The Instructions for Form 1120S, pages 45 and 46, explain this. Line 8 can not be negative due to distributions. The distributions may be limited on line 7 even when Line 1 and Line 6 are both positive. When the net adjustment for lines 2 through 5 is negative, the ordering rules are switched and AAA is decreased by ordinary distributions (but not below zero) before the net negative adjustment for lines 2 through 5. The preceding rules pertain to when the net adjustment for lines 2 through 5 is positive. If line 6 is negative, then line 7 will be zero, as to allow an amount on this line would take the AAA to a larger negative number (even more below zero than it is). Thus, if the distributions are $20,000, but the net amount on line 6 is $10,000, line 7 will be limited to $10,000.
Once the above adjustments are made, the AAA is reduced by ordinary distributions on line 7, but not below zero.The AAA is then decreased for any Loss from page 1, line 21 (line 4) and other reductions listed on line 5.The Accumulated Adjustments Account (AAA) is increased for ordinary income from page 1, line 21 (line 2) and other additions listed on line 3.Due to prior year losses and reductions, the amount on line 1 can be negative. The balance at the beginning of tax year, line 1 is either zero or the balance carried forward from line 8 of the previous year.These rules are as follows for Schedule M-2, Column a: The distributions are limited due to the ordering rules under Reg 1.1368.2. Why are the distributions not flowing to 1120S, Schedule M-2?ĭistributions reported on Line 7 of the Schedule M-2, Form 1120S may carry differently than the amount entered on the Schedule K, Line 16d.
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