In: Accounting
Please explain the purpose of AAA Account (accumulated adjustment account) on the S corporation return. Can it have a negative ending balance? Please explain.
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. According to the United States tax code, there are earnings or profits that corporations are required to retain in their balance sheet, this is to ensure that taxable income distributed to shareholders are given required tax treatments.
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As Per the 1120S Schedule M-2 instructions, the accumulated adjustments account is adjusted in the following order:
If the S Corporation has a net negative adjustment, the accumulated adjustments account is first reduced by the distributions, but not less than zero. Any remaining amount of the accumulated adjustment account is then reduced by the net negative adjustment.