You cannot enter a negative number screen M2, line 1, Column B.

Column B contains income that meets all of these requirements:

• was earned before 1983 in a year in which the corporation was an S corporation

• has been taxed to the shareholders

• has not been distributed or has earnings and profits accumulated from its earlier C corporation years

As this column is based on earnings and income, it will never have a negative amount.

NOL

Under Code Section 535, accumulated taxable income means taxable income, adjusted in the manner provided in subsection (b), minus the sum of the dividends paid deduction and the accumulated earnings credit. Code Section 535(b)(4) specifically states “The net operating loss deduction provided in section 172 shall not be allowed.” Thus, net operating losses are not included in this column.

If the S corporation was a C corporation with Net Operating Losses, Code Section 1371(b)(1) specifies “no carryforward, and no carryback shall arise at the corporate level for a taxable year for which a corporation is an S corporation.” In other words, no carryforward or carryback arising for a tax year for which a corporation is a C corporation can be carried to a year the corporation is an S corporation. The NOL of the corporation is maintained off the tax return and available for use when the corporation resumes C status, if the carryforward period has not expired.

The Schedule M-2 on Form 1120-S is not a reconciliation of retained earnings as it is on an 1120, but rather a reconciliation of the corporate accounts that affect shareholder’s basis.