S Corp Page Four Schedule M2

[Bjorn]

I've got an s-corp which is not doing too much real work any more and has a negative amount on Schedule M2 line 8 -115,000.00

There are not distributions and no profit in this S-corp.

This will close down in a year or so.

Question:

Does this negative number have any serious impact when the S-corp is finally closed.

Mahalo

Bjorn

[dsi]

Were they always an S-corp? And, what caused line 8 to be a loss?

[Bees Knees]

Does this negative number have any serious impact when the S-corp is finally closed.

Line 8 being negative means the S corp AAA is in the hole. AAA has only one function...to record the amount of S corp earnings that have been passed through to shareholders and taxed on their personal returns. A negative number indicates that S corp losses were passed through to shareholders who may or may not have been able to deduct them, depending on their basis in the S corporation.

The only impact, therefore, of a negative AAA balance is that the S corp shareholders have already had their losses passed through to them in prior years, and that there might not be anything left to offset the gain they might have when the S corp liquidates its assets at FMV to its shareholders.

For example, say your S corp has lost money over the years so that it is currently showing $115,000 negative AAA on line 8, Schedule M-2. The corporation has no money left in the checking account, it has a bunch of liabilities which consist of shareholder loans to the corporation, and one asset…a machine with a FMV of $10,000 and a basis of zero.

Upon liquidation, the machine will trigger $10,000 depreciation recapture at ordinary tax rates at the corporate level, meaning the shareholder(s) will get a K-1 with $10,000 ordinary income on it. If the shareholder(s) has already used up his or her basis in prior years (including loan basis) deducting the AAA losses that were passed through, there might not be any basis left to offset the $10,000 gain.