C Corp. Converts to S Corp. Schedule M2 Presentation

[Unregistered]

Client converts from C Corp. with $200,000 in retained earnings at beginning of year. In 2005, the company paid $60,000 in federal income tax for income earned as a C Corp. and had $75000 in current year income. How does the M2 get presented? I believe the AAA account has no beginning balance and I also belive the federal income taxes paid is a negative adjustment to OAA. Where does the accumulated E&P get reported? Shouldnt the M2 tie out to the ending retained earnings on Schedule L?

[Bees Knees]

C corporation earnings and profits (E&P) is not reported in any of the Schedule M-2 accounts. Line 8 of Schedule M-2 for all three columns DOES NOT have to tie in with Schedule L equity. The federal taxes paid on the C corporation taxable income is reflected in E&P and does not show up on the Schedule M-2, so don't put it in OAA or AAA or column (c).

For years, I have wondered why IRS doesn't include another column for C corp E&P on the Schedule M-2, but thats just the way it is.

[Matt Sova]

That's right

Bees is correct on this. I have also wondered why they do not include it in the M-2. My software (UltraTax) has a worksheet of RE that ties everything out to the Schedule L.

[OldJack]

Client converts from C Corp. with $200,000 in retained earnings at beginning of year.

Just a reminder that your client has to determine the FMV of all assets and determine gain or loss as though the each asset was sold as of the effective date of the S-corp election. This is called the built-in-gain/loss for each asset and tax must be paid by the S-corp if sold or disposed of before the end of 10 years from date of S-corp election.

[veritas]

Hopefully this is not a cash basis corp with lots of receivables.

[Unregistered]

Not to steal this thread but what is the proper presentation for an S Corp. that has Accumulated E&P?

[Unregistered]

Looking at the Small Business QuickFinder page D9 - It states "The OAA is used (by an S corporation that has AE&P) to track items that affect shareholder basis but not AAA. The OAA is increased by tax-exempt income and decreased by related expenses and distributions to shareholders from the account. The account is also decreased by federal tax paid that is attributable to a C Corporation tax year...."

???

[Bees Knees]

The 2004 Small Business QF, page D-10 says "The OAA is used only by an S corporation that has accumulated E&P. The OAA is increased by tax-exempt income and decreased by related expenses and distributions to shareholders from the account. The account is also decreased by federal tax paid which is attributable to a C corporation tax year."

Note: That paragraph did not say the OAA is used to account for the E&P. It is ONLY used to track tax exempt income and related expenses IF the corporation was at one time a C corporation with E&P. So if the corporation does not have tax exempt earnings from municipal bonds or the like, you don't use the OAA account to track anything. E&P is a separate account, and the Small Business Quickfinder never said it was part of OAA.

[Unregistered]

The 2004 Small Business QF, page D-10 says "The OAA is used only by an S corporation that has accumulated E&P. The OAA is increased by tax-exempt income and decreased by related expenses and distributions to shareholders from the account. The account is also decreased by federal tax paid which is attributable to a C corporation tax year."

Note: That paragraph did not say the OAA is used to account for the E&P. It is ONLY used to track tax exempt income and related expenses IF the corporation was at one time a C corporation with E&P. So if the corporation does not have tax exempt earnings from municipal bonds or the like, you don't use the OAA account to track anything. E&P is a separate account, and the Small Business Quickfinder never said it was part of OAA.

The comment was in response to your statement that Federal Taxes for a C Corp. year does not get reported in OAA. I did not say that it was a repalcement for E&P. Just wanted to clairfy your comment.

Regards