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How to enter the Accumulated Adjustments Account (AAA) for an S-Corporation in Lacerte

by Intuit Updated 1 year ago

 To complete the Accumulated Adjustments Account (AAA) for Form 1120S, Schedule M-2, follow these steps:

  1. Go to Screen 32, Schedule M-2.
  2. Enter the Beginning balance.
    • If this client was transferred from a prior year, this amount should be carried over during the proforma process.
  3. Enter any Other additions to be included on Schedule M-2, Line 3.
    • Income items on the Schedule K (other than Ordinary Income) flow to Line 3 automatically.
  4. Enter the Amount of Other Additions to carry to Schedule L.
    • Amounts entered in Other Additions don't automatically flow to the calculation for retained earnings; enter the amount here to include it in the balance sheet calculation.
  5. Enter any Other reductions to be included on Schedule M-2, Line 5. 
  6. Enter the Amount of Other Reductions to carry to Schedule L.
    • Amounts entered in Other reductions don't automatically flow to the calculation for retained earnings; enter the amount here to include it in the balance sheet calculation.
  7. Enter an amount in Distributions other than dividends [O] to reduce the AAA if distributions from AAA are different from the amount entered in Property Distributions (Screen 8, code 101 or Screen 27, code 120).
    • Enter -1 if the amount is zero. Lacerte carries this amount to Schedule M-2, Line 7, column (a).
  8. View the Accumulated Adjustments Account on Form 1120S, page 4, Schedule M-2.

Lacerte, by default, will limit distributions to the balance. It reduces AAA (determined without regard to any net negative adjustment for the tax year) for distributions, but not below zero, per the Schedule M-2 instructions and Reg. Section 1.1368–2. If you wish to not limit distributions to balance, enter a 2 in Distributions from AAA: 1 = limited to balance, 2 = not limited to balance [O] (code 118).

Additional information regarding the AAA

  • The AAA includes the S corporation's operating income (loss) for the year from trade, business, passive, and nonpassive activities.
  • An S corporation uses the AAA account to calculate the tax effect of distributions made by the S corporation coming from accumulated earnings and profits (E&P).
  • The S corporation is required to establish a zero balance on the AAA account on the first day of its first tax year.

These items increase the Accumulated Adjustments Account

  • All corporate income items (except tax exempt income) that are separately stated and passed through to the shareholders
  • The ordinary income of the S corporation (non-separately stated income)
  • Oil & Gas depletion deductions in excess of basis

These items decrease the Accumulated Adjustments Account

  • Distributions by the S corporation which aren't required to be included in the shareholders income (return of basis)
  • S corporation's loss and deduction items (except nondeductible items) that are separately stated and passed through to shareholders
  • The ordinary loss of the S corporation
  • Any nondeductible items that aren't related to the production of tax-exempt income
  • The shareholders deduction for Oil & Gas depletion
Lacerte Tax

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