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

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 the required allocation of non-dividend distributions to the AAA balance. Calculation and maintenance of an S corp's AAA balance are 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 tested tips for minimizing tax on S corp shareholders.

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

The panel will discuss these and other important topics:

• What is the interrelation 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 other adjustments accounts?

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 AAA balance

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ mid-level tax experience preparing complex tax forms and schedules, including supervising other preparers and accountants. Specific knowledge and understanding of pass-through entity taxation, foundational knowledge of S corporation shareholders accumulated adjustment accounts and Section 1368 ordering rules.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).