Question: Do Distributions Reduce AAA?

Can AAA go negative from distributions?

AAA can be taken negative by a loss, but not by a distribution.

See Example 2 on page 2.

(This favorable rule allows an S corporation to always be able to distribute the positive balance of the prior years ending AAA without it being taxed as a dividend.).

Are distributions in excess of AAA taxable?

Tier 2: Distributions in excess of AAA are treated as dividends to the extent of the accumulated E&P balance. … This does not mean, however, that the distribution is tax-free; rather, it simply means that the distribution will not represent a taxable dividend.

Do nondeductible expenses reduce AAA?

As previously indicated, AAA, unlike a shareholder’s basis in S corporation stock, is not increased for tax-exempt income, nor is it decreased for nondeductible expenses attributable to tax-exempt income.

What is AAA and OAA?

The AAA is a special account used to track undistributed earnings of the S corporation that have already been taxed to the shareholders. Nontaxable income and nondeductible expenses are not recorded in the AAA. Instead these are recorded in OAA. Any distributions of AAA decrease the AAA.

Are K 1 distributions considered income?

Just like any other income or tax document you get during tax season, you need to report your schedule K-1 when you file your taxes — for two reasons: It’s taxable income. It’s already been reported to the IRS by the entity that paid you, so the IRS will know if you omit it when you file taxes.

Are shareholder distributions taxable?

Shareholders recognize a taxable dividend to the extent a distribution is paid out of corporate earnings and profits (E&P). If the distribution exceeds E&P, the excess reduces the shareholder’s stock basis. Any amount in excess of the shareholder’s stock basis is capital gain (Secs.

Should AAA account equal retained earnings?

“The main difference (between retained earnings and AAA on the 1120-S) will be (due to) timing differences between book and tax (reporting obligations). For example, if the book depreciation is less than the tax depreciation, the retained earnings account on the balance sheet will be larger than the AAA balance.”

Where do you report distributions in excess of basis on 1040?

Yes, if you received a distribution that was more than your adjusted basis, you have taxable income. In most cases, this is a long-term capital gain, which is reported on Schedule D (as a sale with no basis).

How are distributions in excess of basis taxed?

A non-dividend distribution in excess of stock basis is taxed as a capital gain on the shareholder’s personal return. … A shareholder is not allowed to claim loss and deduction items in excess of stock and/or debt basis.

What is a AAA distribution?

AAA is a unique S corporation concept that “is an account of the S corporation and is not apportioned among shareholders” (Regs. Sec. 1. 1368-2(a)(1)). AAA begins at zero on the first day the corporation elects to be taxed as an S corporation (id.).

How do you report shareholder distributions?

Dividend distributions paid to shareholders of an S corporation are reported on Form 1099-DIV, and on Schedule K, Line 17c. Loan repayments to shareholders are reported on Schedule K, Line 16e, and on each individual shareholder’s Schedule K-1, line 16, with a reference code of “E.”.

Are liquidating distributions taxable?

Proceeds from a cash liquidation distribution can be either a non-taxable return of principal or a taxable distribution, depending upon whether or not the amount is more than the investors’ cost basis in the stock. … Payments in excess of the total investment are capital gains, subject to capital gains tax.