Page 177 - BusinessStructures & Forms

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
subtracting instead the property's adjusted basis. If the total Column (d). Other Adjustments Account
decreases under (2) exceed the total increases under (1) above, The other adjustments account is adjusted for tax-exempt
the excess is a “net negative adjustment.” If the corporation has income (and related expenses) and federal taxes attributable to
a net negative adjustment, don't take it into account under (2). a C corporation tax year. After these adjustments are made, the
Instead, take it into account only under (4) below. account is reduced for any distributions made during the year.
3. Decrease AAA (but not below zero) by property See Distributions, later.
distributions (other than dividend distributions from AE&P),
unless the corporation elects to reduce AE&P first. See PPP loans. An S corporation should include tax-exempt
Distributions, later, for definitions and other details. TIP income from the forgiveness of PPP loans in column (d)
4. Decrease AAA by any net negative adjustment. For on line 3 of the Schedule M-2.
adjustments to the AAA for redemptions, reorganizations, and
An S corporation should report expenses paid this year with
corporate separations, see Regulations section 1.1368-2(d). proceeds from PPP loans that were forgiven this year in column
The AAA may have a negative balance at year end. See (d) on line 5 of the Schedule M-2.
TIP section 1368(e). If column (a) on line 2 or line 4 of the Schedule M-2 includes
expenses paid with proceeds from forgiven PPP loans, an S
Column (b). Shareholders' Undistributed corporation should report that amount in column (a) on line 3 and
Taxable Income Previously Taxed in column (d) on line 5 of the Schedule M-2.
The shareholders' undistributed taxable income previously taxed If column (a) on line 1 of the Schedule M-2 includes expenses
account, also called previously taxed earnings and profits that were paid in a prior year with proceeds from PPP loans that
(PTEP), is maintained only if the corporation had a balance in were forgiven this year, an S corporation should report that
this account at the start of its 2022 tax year. If there is a amount in column (a) on line 3 and in column (d) on line 5 of the
beginning balance for the 2022 tax year, no adjustments are Schedule M-2.
made to the account except to reduce the account for
distributions made under section 1375(d) (as in effect before the Distributions
enactment of the Subchapter S Revision Act of 1982). See General rule. Unless the corporation makes one of the
Distributions, later, for the order of distributions from the elections described below, property distributions (including
account. cash) are applied in the following order (to reduce accounts of
Each shareholder's right to nontaxable distributions from the S corporation that are used to figure the tax effect of
PTEP is personal and can't be transferred to another person. distributions made by the corporation to its shareholders).
The corporation is required to keep records of each 1. Reduce the AAA determined without regard to any net
shareholder's net share of PTEP. negative adjustment for the tax year (but not below zero). If
distributions during the tax year exceed the AAA at the close of
Column (c). Accumulated Earnings and Profits the tax year, determined without regard to any net negative
If the corporation was a C corporation in a prior year, or if it adjustment for the tax year, the AAA is allocated pro rata to each
engaged in a tax-free reorganization with a C corporation, enter distribution made during the tax year. See section 1368.
the amount of any AE&P at the close of its 2021 tax year on 2. Reduce shareholders' PTEP account for any section
line 1 in column (c). For details on figuring AE&P, see section 1375(d) (as in effect before 1983) distributions. A distribution
312. Estimates based on retained earnings at the end of the tax from the PTEP account is tax free to the extent of a
year are acceptable. If the corporation has AE&P, it may be shareholder's basis in the shareholder's stock in the corporation.
liable for tax imposed on excess net passive income. See 3. Reduce AE&P. Generally, the S corporation has AE&P
Excess net passive income tax, earlier, for details on this tax. only if it hasn't distributed E&P accumulated in prior years when
the S corporation was a C corporation (section 1361(a)(2)). See

Schedule M-2 Worksheet Keep for Your Records

(a) (b) (c) (d)
Accumulated Shareholders' Accumulated Other adjustments
adjustments account undistributed taxable earnings and profits account
income previously taxed
1. Balance at beginning of tax -0- -0-
year . . . . . . . . . . . . . . . . . . . . .
2. Ordinary income from page 1,
line 21 . . . . . . . . . . . . . . . . . . . 10,000
3. Other additions . . . . . . . . . . . . . 20,000 5,000
4. Loss from page 1, line 21 . . . . . . . ( )
5. Other reductions . . . . . . . . . . . . (36,000) ( )
6. Combine lines 1 through 5 . . . . . . (6,000) 5,000
7. Distributions . . . . . . . . . . . . . . . -0- 5,000
8. Balance at end of tax year. Subtract
line 7 from line 6 . . . . . . . . . . . . . (6,000) -0-

Instructions for Form 1120-S (2022) -47-