-Accumulated Adjustments Account (AAA)

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  Home>S-Corporation>S Corporation Shareholders>Accumulated Adjustments
Account (AAA)

1. _Accumulated Adjustments Account (AAA)_.

1. _In General_.

1. The AAA is an account of the S corporation which is increased and
decreased for the "S period" in a manner similar to adjustments to the
basis of stock of S corporation shareholders (§ 1368(e)(1)(A)), with two
exceptions:

1. No adjustment is made for tax-exempt income and related expenses or for
Federal taxes attributable to any taxable year in which the corporation was
a C corporation (§ 1368(e)(1)(A)).

1. This rule could actually cause distributions of tax-exempt income to be
taxable as dividends if the S corporation has accumulated earnings and
profits, since tax-exempt income does not increase AAA (§ 1368(c) and
(e)(1)).

1. The corporation's AAA can be reduced below zero, in which case the AAA
must be restored to a positive amount before taxable distributions from
accumulated earnings and profits can be avoided. The AAA, however, cannot
be reduced below zero by distributions. Distributions by an S corporation
with accumulated earnings and profits (AEP) are tax-free only to the extent
of the AAA and stock basis (§ 1368(c)(1) and (b)(1)). If an S corporation
has a negative AAA, a distribution of current income that restores the
account to zero will still be "in excess of the AAA" and therefore
considered a dividend to the extent of AEP. Income distributed under these
circumstances is taxed twice: once as a pass-through item and once as a
dividend.

1. The one consolation a stockholder has in such circumstances is that the
income that restores the AAA to zero also increases his basis in debt or
stock, which then reduces or eliminates gains that would otherwise accrue
upon selling the stock or having the loan repaid.

1. The purpose of the


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can aaa be negative

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