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11592: 1120S - M-2 versus Retained Earnings


1120S Sub S Corporate

Schedule M-2 and Retained Earnings

When trying to reconcile the Accumulated Adjustments Account (AAA) to retained earnings, keep in mind that the Schedule L on the 1120S is the balance sheet of the corporation for book purposes and the AAA account is a tax schedule only. There are adjustments that must be made to book income for tax purposes. The M-1 adjustments are either permanent or temporary, dependent upon tax law.

AAA Versus Retained Earnings Reconciliation

For example:

When we combine Sch M-2, Columns (a) and (d) (Columns (a) and (b) in Drake17 and prior) we note the difference between the AAA and retained earnings is $3,900.

Retained Earnings (Per Sch L) 335,000
Schedule M-2 Balance 331,100
Sch M-2 / Sch L Difference 3,900
Bonus Depreciation (Sch M-1, Line 6a) 5,400
§179 Expense (Sch M-1, Line 6a) 23,500
Bad Debt Allowance Adjustment (Sch M-1, Line 2) -25,000
Total 3,900
Unreconciled Difference 0

Because the M-1 adjustments made for book to tax reconciliation are temporary, in this situation the retained earnings and the AAA account would balance in future years barring any other adjustments. There are situations, however, when the M-1 adjustments would be permanent and thus the retained earnings and accumulated adjustments accounts would never reconcile.


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