Drake Tax – 1120-S: M-2 Versus Retained Earnings
Article #: 11592
Last Updated: November 06, 2024
When trying to reconcile the Accumulated Adjustments Account (AAA) to retained earnings, keep in mind that the Schedule L on the 1120-S 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.
When we combine Schedule M-2, Columns (a) and (d), we note the difference between the AAA and retained earnings is $3,900.
| Line Item | Calculation |
|---|---|
| Retained Earnings (Per Schedule L) | 335,000 |
| Schedule M-2 Balance | 331,100 |
| Schedule M-2 / Schedule L Difference | 3,900 |
| Bonus Depreciation (Schedule M-1, Line 6a) | 5,400 |
| §179 Expense (Schedule M-1, Line 6a) | 23,500 |
| Bad Debt Allowance Adjustment (Schedule 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.