Why are distributions limited to balance of AAA when Retained earnings are available?

Forum|Forum|6 years ago
December 7, 2019
14 replies
135 views

Is this a technical problem within ProSeries? I have available retained earnings to put distributions against, but not enough in my AAA. Why does ProSeries automatically limit the distribution to the amount available in AAA and mark the rest as Distributions in excess of Retained Earnings on the M-2 worksheet? Is the only workaround an over ride on the M-2 worksheet?

ProSeries Professional

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Best answer by TaxMonkey

Why are your Retained Earnings greater than AAA? Did they used to be a C-corp?

T

TaxMonkeyAnswer

Level 7

Why are your Retained Earnings greater than AAA? Did they used to be a C-corp?

sjrcpa

Level 15

It's the tax law.

The more I know the more I don’t know.

R

rbmuCPAAuthor

Level 3

I understand that distributions cannot reduce AAA below 0, but AAA and Retained earnings are not one in the same. Though they more than likely should closely mirror each other.

Distributions can be in excess of Retained Earnings and Retained Earnings can be less than 0, whether they should be from the perspective of how one runs their business is a different matter. If this was not the case then, the balance sheet for tax purposes and book purposes would be different.

Is this just an instance of accounting standards and tax law clashing and ProSeries is erring on the side of safety and preventing the balance sheet from showing a debit balance from distributions due to the limitation imposed on AAA?

T

trvw181

Level 3

ProSeries does not handle this situation well. I used PrSystem FX at my previous firm and that software would do a reconciliation between AAA and RE that automatically handled distributions in excess of AAA (not in excess of basis). The following year if you had an increase in AAA, it would automatically decrease the timing difference. I've been overriding the distributions on the M-2/Retained Earnings worksheet in ProSeries for years, both in the years that the distributions exceed AAA and again in the years when net income exceeds current distributions to reverse the timing difference.

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