What Is The Difference Between AAA And OAA?

What is AAA in an S corporation?

Tax professionals working in the S corporation environment regularly track earnings and profits (E&P) and the accumulated adjustments account (AAA) for their clients.

Most of the time, these accounts are tracked to determine the tax effect of distributions made by an S corporation that was formerly a C corporation..

How is AAA calculated?

The amount of the AAA allocated to each distribution is determined by multiplying the balance of the AAA at the close of the current taxable year by a fraction, the numerator of which is the amount of the distribution and the denominator of which is the amount of all distributions made during the taxable year.

What is the tax rate for S Corp distributions?

S Corporations are taxed at the shareholder rate on personal returns with a 20% deduction on income from the pass-through entity.

What does Schedule M 2 tell you?

Schedule M-2 – Analysis of Partner’s Capital Accounts is the section in Form 1065 – U.S. Return of Partnership Income where the partnership reports to the IRS what caused the changes to the partners’ capital accounts on the partnership’s books and records.

What is AAA account?

The AAA is shown on the last page of Form 1120S and measures the amount of previously taxed but undistributed earnings of your corporation. The account is adjusted each year to reflect business activity such as current income and distributions. … The AAA account, on the other hand, can be a negative number.

How do you reconcile retained earnings?

The retained earnings calculation or formula is quite simple. Beginning retained earnings corrected for adjustments, plus net income, minus dividends, equals ending retained earnings. Just like the statement of shareholder’s equity, the statement of retained is a basic reconciliation.

What is the OAA account?

Form 1120S, U.S. Income Tax Return for an S Corporation, refers to the corporation’s other adjustments account (OAA). The OAA reconciles those items that increase or decrease a shareholder’s stock basis but not AAA, primarily tax-exempt income and deductions 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.

Can the AAA account be negative?

Lastly, while AAA can be driven negative by losses, a shareholder’s basis in the S corporation’s stock cannot be below zero.

Do distributions reduce AAA?

Unlike stock basis, AAA may be reduced below zero, but only by losses, not by a distribution. … If an S corporation has a net positive adjustment for the year, AAA is adjusted for the net positive adjustment prior to reducing AAA for any distributions made for the year.

What is AAA on a balance sheet?

As used in the United States, the Accumulated Adjustments Account (AAA) is an account that contains the net retained earnings of a corporation. It is often used by S corporations, it is an item on a corporation’s balance sheet that accounts for taxable income that are passed to stakeholders.

What is AE&P?

AE&P is also a measure of the undistributed earnings of a corporation, but from a tax point of view. In other words, accounting rules govern the determination of retained earnings, while AE&P is calculated under tax law. Because of these differences, AE&P seldom matches retained earnings.

Why is AAA different from 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.”

Are distributions taxed as ordinary income?

Dividends are the most common type of distribution from a corporation. They’re paid out of the earnings and profits of the corporation. … Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates.

What is Retained earnings time difference?

The Retained earnings – Unappropriated/Timing Differences (REU) fields in Screen Ms are used to reconcile the Schedule M-2 balances to the total retained earnings on Schedule L. If you reconcile your Schedule M-2 on a book basis, you will probably not use the REU account.