Page 178 - BusinessStructures & Forms

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
section 312 for information on E&P. The only adjustments that identify the election it is making and must state that each
can be made to the AE&P of an S corporation are: shareholder consents to the election. The statement of election
a. Reductions for dividend distributions; to make a deemed dividend must include the amount of the
b. Adjustments for redemptions, liquidations, deemed dividend distributed to each shareholder. For more
details on the election, see Regulations section 1.1368-1(f)(5).
reorganizations, etc.; and
c. Reductions for investment credit recapture tax for which Example
the corporation is liable. The following example shows how the Schedule M-2 accounts
See section 1371(c) and (d)(3). are adjusted for items of income (loss), deductions, and
4. Reduce the other adjustments account (OAA). distributions reported on Form 1120-S. In this example, the
5. Reduce any remaining shareholders' equity accounts. corporation has no PTEP or AE&P.
Items per return are:
Elections relating to source of distributions. The 1. Page 1, line 21 income—$10,000;
corporation may modify the above ordering rules by making one
or more of the following elections. 2. Schedule K, line 2 loss—($3,000);
Election to distribute AE&P first. If the corporation has 3. Schedule K, line 4 income—$4,000;
AE&P and wants to distribute from this account before making 4. Schedule K, line 5a income—$16,000;
distributions from the AAA, it may elect to do so with the consent 5. Schedule K, line 12a deduction—$24,000;
of all its affected shareholders (section 1368(e)(3)(B)). This
election is irrevocable and applies only for the tax year for which 6. Schedule K, line 12d deduction—$3,000;
it is made. For details on making the election, see Statement 7. Schedule K, line 13g work opportunity credit—$6,000;
regarding elections, later. 8. Schedule K, line 16a tax-exempt interest—$5,000;
Election to make a deemed dividend. If the corporation
wants to distribute all or part of its AE&P through a deemed 9. Schedule K, line 16c nondeductible expenses—$6,000
dividend, it may elect to do so with the consent of all its affected (reduction in salaries and wages for work opportunity credit);
and
shareholders (section 1368(e)(3)(B)). Under this election, the
corporation will be treated as also having made the election to 10. Schedule K, line 16d distributions—$65,000.
distribute AE&P first. The amount of the deemed dividend can't Based on items (1) through (10) above and starting balances
exceed the AE&P at the end of the tax year. The E&P at year of zero, the columns for the AAA and the other adjustments
end is first reduced by any actual distributions of AE&P made account are completed as shown in the Schedule M-2
during the tax year. A deemed dividend is treated as if it were a Worksheet.
pro rata distribution of money to the shareholders, received by
the shareholders, and immediately contributed back to the For the AAA, the worksheet line 3—$20,000 amount is the
corporation, all on the last day of the tax year. This election is total of the Schedule K, lines 4 and 5a income of $4,000 and
irrevocable and applies only for the tax year for which it is made. $16,000. The worksheet line 5—$36,000 amount is the total of
For details on making the election, see Statement regarding the Schedule K, line 2 loss of ($3,000), line 12a (code A)
elections, later. deduction of $24,000, line 12d (code S) deduction of $3,000,
Election to forego PTEP. If the corporation wants to forego and the line 16c nondeductible expenses of $6,000. The
distributions of PTEP, it may elect to do so with the consent of all worksheet line 7 is zero. The AAA at the end of the tax year
its affected shareholders (section 1368(e)(3)(B)). Under this (figured without regard to distributions and the net negative
election, item (2) under General rule, earlier, doesn't apply to any adjustment of $6,000) is zero, and distributions can't reduce the
distribution made during the tax year. This election is irrevocable AAA below zero.
and applies only for the tax year for which it is made. For details For the other adjustments account, the worksheet line 3
on making the election, see Statement regarding elections next. amount is the Schedule K, line 16a, tax-exempt interest income
Statement regarding elections. To make any of the above of $5,000. The worksheet line 7 amount is $5,000, reducing the
other adjustments account to zero. The remaining $60,000 of
elections, the corporation must attach a statement to a timely distributions aren't entered on Schedule M-2.
filed original or amended Form 1120-S for the tax year for which
the election is made. In the statement, the corporation must

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1120-L, 1120-PC, 1120-REIT, 1120-RIC, 1120-POL, and related attachments. Time spent and out-of-pocket costs are presented
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-48- Instructions for Form 1120-S (2022)