More 1120-S woes

[appelman]

I seem to attract this sort of client. I have a new client with a one-person S-Corp that has never, in its six years of filing, reported any distributions. As a result of this, and other errors by his previous preparer, his Schedules M-2 are a mess. (Schedules L and M-1 are not required.) He has plenty of basis, so there are no immediate tax consequences. The question is, what to do about it now. I have reconstructed the distributions and AAA as well as possible, but I am reluctant to amend six years of returns and stir up who-knows-what further mischief done by his previous preparer. Is it feasible to report the whole cumulative distribution in 2013? Or what? We are talking a cumulative distribution around 200K, roughly comparable to cumulative earnings. All suggestions are welcome.

[BHoffman]

Hi Evan - 1120S form instructions:

"Schedule M-2. Analysis of Accumulated Adjustments Account, Other Adjustments Account, and Shareholders' Undistributed Taxable Income Previously Taxed
Column (a). Accumulated Adjustments Account
The accumulated adjustments account (AAA) is an account of the S corporation that generally reflects the accumulated undistributed net income of the corporation for the corporation's post-1982 years. S corporations with accumulated E&P must maintain the AAA to determine the tax effect of distributions during S years and the post-termination transition period. An S corporation without accumulated E&P does not need to maintain the AAA in order to determine the tax effect of distributions. Nevertheless, if an S corporation without accumulated E&P engages in certain transactions to which section 381(a) applies, such as a merger into an S corporation with accumulated E&P, the S corporation must be able to calculate its AAA at the time of the merger for purposes of determining the tax effect of post-merger distributions. Therefore, it is recommended that the AAA be maintained by all S corporations."

From here:

http://www.irs.gov/pub/irs-pdf/i1120s.pdf

[appelman]

Yes, but...

Hi Evan - 1120S form instructions:

"Schedule M-2. Analysis of Accumulated Adjustments Account, Other Adjustments Account, and Shareholders' Undistributed Taxable Income Previously Taxed
Column (a). Accumulated Adjustments Account
The accumulated adjustments account (AAA) is an account of the S corporation that generally reflects the accumulated undistributed net income of the corporation for the corporation's post-1982 years. S corporations with accumulated E&P must maintain the AAA to determine the tax effect of distributions during S years and the post-termination transition period. An S corporation without accumulated E&P does not need to maintain the AAA in order to determine the tax effect of distributions. Nevertheless, if an S corporation without accumulated E&P engages in certain transactions to which section 381(a) applies, such as a merger into an S corporation with accumulated E&P, the S corporation must be able to calculate its AAA at the time of the merger for purposes of determining the tax effect of post-merger distributions. Therefore, it is recommended that the AAA be maintained by all S corporations."

From here:

http://www.irs.gov/pub/irs-pdf/i1120s.pdf

The instructions do not explicitly excuse you from completing Schedule M-2. And, in this case, Schedule M-2 has been completed in the past, albeit incorrectly.