Calculating S Corp Accumulated Adjustment Accounts: Mastering the Section 1368 Ordering Rules

Minimizing Tax on Distributions, Navigating the Interplay Between Shareholder Basis and Corporate AAA Balance

Recording of a 110-minute CPE webinar with Q&A


Conducted on Thursday, June 15, 2017
Recorded event now available


This webinar will provide tax professionals and advisers with the tools and understanding to correctly calculate an S Corporation’s accumulated adjustments account (AAA) and to effectively advise clients to avoid negative tax consequences due to loss limitations or excess distributions. The panel will contrast AAA calculations with those of shareholder basis, tie AAA to the related concept of retained earnings in C Corporations, and identify specific challenges in calculating AAA and in resulting tax planning and compliance.

Description

An essential but often neglected element of S Corporation tax planning and compliance is calculation of the company’s AAA balance. An S Corp’s AAA balance represents the corporate-level accounting of undistributed earnings of the company that have been previously taxed to the shareholders.

Equivalent to a C Corporation’s retained earnings, the balance in the AAA represents the running amount of earnings held in the S Corp. In conjunction with a shareholder’s stock and debt basis calculations the AAA balance impacts the tax treatment of distributions when the S Corp has accumulated earnings and profits, or where the S Corp previously operated as a C Corp, or acquired the assets of a C Corp in a Section 381 transaction.

Calculating AAA can present challenges to advisers not versed in the Section 1368 ordering rules, which specify the sequence in which income, gains, losses and non-dividend distributions must be allocated to the AAA balance. Calculation and maintenance of an S Corp’s AAA balance is crucial to the tax planning of the company’s operations.

Listen as our experienced panel provides a thorough and practical guide to S Corporation AAA calculations and offers practical tips for minimizing tax on S Corp shareholders.

Outline

  1. Accumulated adjustment account vs. shareholder basis
  2. AAA when the S Corporation has accumulated E&P
  3. Impact of AAA on tax treatment of distributions for S Corps with E&P
  4. Calculating AAA
  5. Ordering rules of Section 1368 and regulations
    1. Income and gains
    2. Losses and deductions
    3. Non-dividend distributions
    4. Net negative adjustments
  6. Other adjustments account issues
  7. Available elections

Benefits

The panel will discuss these and other important topics:

  • What is the inter-relation between an S Corp shareholder’s stock basis and the S Corp AAA balance?
  • What is the impact of E&P on AAA calculations and on tax treatment of distributions from an S Corp that has E&P?
  • What are the ordering rules for allocating AAA adjustments of income, gain and loss?
  • What items are included in an other adjustments account?

Learning Objectives

After completing this course, you will be able to:

  • Recognize what items of income, gain, loss and distributions must be included in AAA calculations
  • Discern the ordering rules for allocating adjustments to AAA
  • Determine the tax impact of distributions for S Corps with accumulated E&P under various AAA balance scenarios
  • Identify items of income and deduction that must be allocated to the OAA balance

Faculty

Robert W. Jamison, CPA, Professor Emeritus of Accounting
Indiana University, Kelley School of Business, Indianapolis

Mr. Jamison is Professor Emeritus of Accounting at Indiana University, Purdue University, Indianapolis (IUPUI). His principal area of specialization is S Corporations. He is the sole author of S Corporation Taxation, and co-author of Multistate Tax Guide to Pass-Through Entities, both of which are published annually by CCH, a Wolters Kluwer business. He is a regular contributor to Land Grant University Tax Education Foundation, Inc. National Income Tax Workbook and has contributed to Federal Tax Workshop. He presents advanced and update S Corporation seminars for various states' CPA societies and to other professional organizations. He is a member of the AICPA S Corporation Technical Resource Panel. He consults on S corporation and other business entity problems and has secured letter rulings from the IRS.  

Brian T. Lovett, CPA, JD, Partner
WithumSmith+Brown, New Brunswick, N.J.

Mr. Lovett has extensive experience serving the tax needs of both public companies and closely-held businesses, including all aspects of tax compliance for partnerships and corporations. He advises clients with regard to the structure and tax consequences of new business ventures, and assists with restructuring existing businesses for increased tax efficiency. Prior to joining his firm, he was with a “Big 4” accounting firm, working closely with large, multinational real estate investment companies.


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Customer Reviews

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Rhonda G. Williams, CPA

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