distributions in excess of retained earnings

[mary ann]

Can a s-corp shareholder take distributions when retained earnings are negative?  For example, beginning of year RE (and AAA) are both -130K.  Income including PPP forgiveness is 80K.   Shareholder took 82K of distributions.  So ending RE would be -132K if allowed.  Can I adjust ending RE to balance Sch L?  Capital stock has minimal value.

Beginning of year stock basis is 0, but the 80K income would allow 80K of distributions and the extra 2K would be reported as capital gain on the shareholder's 1040.

I read the Intuit article dated 7/13/22 on this topic - implies you can force Proseries to allow these distributions on the M-2 "for certain circumstances" - when is it allowed?  

[sjrcpa]

That's a state law question.

Corporate law, not tax law.

Last time I had this, they could distribute current year income even if RE was negative. I don't remember what state it was.

[mary ann]

I'm dealing with VA, not used to researching corporate law.

I had read that distributions can't reduce AAA below zero per Treas Reg 1.1368-2.  Would that apply here?

[sjrcpa]

Two, or more, different animals. It is correct that distributions cannot reduce AAA below zero. This is an S Corporation tax rule.

Have the client ask their corporate  counsel.