If you’re the owner of a Subchapter S corporation, you’re probably familiar with the accumulated adjustments account. The AAA is shown on the last page of Form 1120S and measures the amount of previously taxed but undistributed earnings of your corporation. The account is adjusted each year to reflect business activity such as current income and distributions.
Since the calculation of the AAA appears to be similar to the way you determine your basis in the corporation, you may think they are the same. But generally the two are very different.
For example, your basis can include your original contribution to the business, as well as tax-exempt income. These items are generally not included when figuring the corporation’s AAA balance.
In addition, your basis in the corporation cannot be less than zero. The AAA account, on the other hand, can be a negative number.
One reason it’s important to understand the difference between basis and the AAA is because your basis determines whether distributions you take from your business during the year are taxable or not. If you rely on your AAA balance when taking distributions, you could be in for a surprise at year-end. Be aware that you are responsible for tracking your basis, while the corporation maintains the records for the AAA.
Give us a call if you would like more information about the AAA and basis calculations.
