Page 208 - TaxAdviser_2022

CASE STUDY
CASE STUDY

Making tax-free distributions

to the extent of AAA

Editor: The accumulated adjustments account meal expenses, fines, and political
John Baer, CPA (AAA) tracks the amount of undistrib- contributions) (excluding expenses
uted income that has been taxed to related to tax-exempt income and
S corporation shareholders after 1982. federal taxes attributable to any tax
S corporations with accumulated earnings year in which the corporation was a
and profits (AE&P) can distribute AAA C corporation);
(to the extent of basis) to a shareholder ■ The amount of the shareholder’s
AAA and AE&P free of further tax. S corporations with- deduction for depletion for any
calculations are out AE&P determine the taxability of oil and gas property to the extent
key to determining distributions without reference to AAA such deduction does not exceed the
shareholder’s proportionate share of
(Sec. 1368); however, practitioners should
stock basis and, keep track of the AAA balance in any the corporation’s basis in the property;
and
thus, the taxability event because part or all of the amount in ■ Distributions that are not dividends
AAA can be distributed tax-free if the S
of shareholder corporation election terminates. Also, the (e.g., distributions other than those
distributions. AAA balance may be beneficial or neces- made from AE&P and distributions
sary to know when certain redemptions made out of AAA).
or mergers occur. AAA can be increased or decreased by
a redemption distribution that is treated
Identifying items that increase as an exchange under Sec. 302(a) or Sec.
and decrease AAA 303(a) (Sec. 1368(e)(1)(B); Regs. Sec.
AAA begins at zero on the first day of 1.1368-2(d)).
the S corporation’s first tax year begin- The Coronavirus Aid, Relief, and
ning after 1982. It is increased by (Sec. Economic Security (CARES) Act, P.L.
1368(e)(1)(A); Regs. Sec. 1.1368-2(a)): 116-136, created the Paycheck Protection
■ Separately and nonseparately stated Program (PPP) under which the U.S.
items of income (but not by tax- Small Business Administration guar-
exempt income), and by anteed loans made to certain businesses
■ The excess of the shareholder’s to help keep their workforce employed
deduction for depletion (excluding oil during the COVID-19 pandemic. If
and gas) over the allocable basis in the certain conditions were met, lenders
property subject to depletion. forgave these loans. The Consolidated
It is decreased by: Appropriations Act, 2021, P.L. 116-260, PHOTO BY COMSTOCK/STOCKBYTE/THINKSTOCK
This case study has been adapted ■ Separately and nonseparately stated confirmed that forgiven PPP loan pro-
from Checkpoint Tax Planning and items of loss or deduction; ceeds are excluded from income and
Advisory Guide’s S Corporations
topic. Published by Thomson Reuters, ■ Corporate expenses that are neither further clarified that these proceeds are
Carrollton, Texas, 2022 (800-431-9025; deductible nor capitalizable (such as to be treated as tax-exempt income under
tax.thomsonreuters.com). the nondeductible portion of business Sec. 1366. In addition, eligible expenses

38 April 2022 The Tax Adviser