help with schedule m-2 1120 s!!!

[Unregistered]

Facts: opening retained earnings $32502
current year loss - 5832
distributions -58768
ending retained earnings $-32098

shareholder has basis for distributions via paid in capital and loans.

m-2 calculation only allows the distributions up to $32502 and indicates an ending balance of -5832 which it carries to the retained earnings balance on the balance sheet. the worksheet has a line for distributions in excess of retained earnings of 26266 but it doesn't flow anywhere and my balance sheet is out of balance.

i have always closed out distributions to retained earnings which would result in a negative retained earnings. how does this excess of distributions over retained earnings per m-2 schedule get reflected in the balance sheet? i can manually change it but am i doing something wrong?

thanks in advance

[KJ Judd]

Schedule M-2 is tax basis & retained earnings on Sch L is book basis. So that may account for some of the issue.

Also, what software are you using? I use Lacerte & there's a box to X somewhere to allow AAA to go negative.

[Matt Sova]

Loans

You said you have loans that increase his basis. Apply the excess distributions against those loans.

Matt

[rosieea]

Technically, distributions cannot take AAA below zero. Therefore, retained earnings and AAA will not necessarily match. Apply the excess distributions to retained earnings; if the balance sheet is still out of balance, then the problem is probably elsewhere.

[theresa d]

That Did It

thanks for the quick response. i use proseries and my software was leading me to believe that the retained earnings and aaa account should agree. i manually changed the retained earnings figure to agree with the amount in the financial statements and i am in balance. thanks for clarifying for me. i thought i was going crazy.

[natiro]

Schedule M-2

My, my, there's a lot of misinformation in this thread.

First of all, I disagree with KJ Judd who says Schedule M-2 is tax basis and retained earnings on Sch L is book basis. Schedule M-2 is actually an analysis of the AAA, OAA, and PTI accounts. This is quite difference than tax basis vs book basis.

I also disagree with Matt Sova who suggests to apply the excess distributions against the loans. I disagree with this. Loan basis can be used to take losses, but not to take distributions.

I agree with rosieea. . .distributions cannot take AAA below zero, which is why there is sometimes a difference between AAA and retained earnings. What your software is doing is taking the distributions first, before the loss, against the balance of AAA, and only up to the balance of AAA (32,502). Then the loss of 5,832 is taken against AAA because losses can take the AAA negative. The taxpayer can only take this loss if he has basis, which it sounds like he does, due to the loans. The distributions in excess of AAA is probably taxable to the shareholder.

It sounds like you got everything to work out correctly but just wanted to add my thoughts to the mix!

[KJ Judd]

I agree with natiro on sch M-2 being an analysis. All of my S corps have always been S corps & have no OAA items so I sometimes forget about OAA & PTI.

Look at the ordering rules for distributions & losses will help clarify things as well.

[lsmith]

M2 1120s

Ordering rules contain the answer. It also sounds as if this S/H may not be on payroll. If not, then they should be.

[Matt Sova]

Disagree with your disagreement

My, my, there's a lot of misinformation in this thread.

I also disagree with Matt Sova who suggests to apply the excess distributions against the loans. I disagree with this. Loan basis can be used to take losses, but not to take distributions.

The Shareholder took 56,768 out of the company during the year. Beginning RE (assuming it is all AAA) is 32,502. Loss for the year is 5,832. That leaves the AAA at 26,670. Apply 26,670 of the cash out as distributions. The remaining 30,098 is a repayment of officer loan.

I do not know why you would think that a Shareholder cannot repay his loan back to himself, it is perfectly legal to do that.

[natiro]

distributions

I stand corrected Matt. . .I guess I took what you said to mean that the loan creates basis for distributions. . .for some reason (brain dead, perhaps???) it never occured to me to take what you said as applying the distribution as payment on the loans!

That said, I believe the distribtions are applied to AAA before the loss. If the distributions are pay back of a loan, then the loss would only be allowed if there is still enough basis left in the loan after payback to take the loss.

Again, sorry Matt. Thanks for correcting my answer.

[Unregistered]

to clarify

matt i considered the idea of applying the distributions against the loan . the reason why we're leaving the loan is that the shareholder took out a personal loan and lent the proceeds to the corp. the corp is paying him interest which gets capitalized in a building project( corp is a contractor) and he picks up the interest income on his personal taxes. has very little impact on his personal taxes as he has little income this year. next year the project will be sold and he will be in 35% bracket. perfer to keep the loan and capitalized interest to reduce the gain in 06 that will be tazxed at 35%. he has basis for the distributions as he also has paid in capital of 80,000. His whole life is wrapped up in this building project-hope it works out.

thanks everyone for all your responses-it clarified the M-2 schedule for me