Final accumulated adjustments account balance in an S corp

[dnelson225]

On Form 1120-S under Schedule M-2 there is an accumulated adjustments account (column a). Can someone please confirm if the balance in this account should be zero on the final S corp return when the business is being dissolved? There are no figures in columns b, c, or d on this form in the return I am referencing. Thanks.

[JosephS1]

When dissolving a S Corporation all the steps taken prior to distributions of the AAA account have to be accounted for.  You state the remaining accounts that make up the S Corps retained earnings are now zero except for the AAA account that based on the above, appears to have a remaining balance.  The remaining balance will be distributed to the shareholders to completely zero out the accounts.  Hopefully you maintained and accurate record of AAA and what is called "Earnings and Profits" so if it is ever contended, you have the documents to back up any contention.  I have linked below an article that lists the steps necessary to completely dissolve an S Corporation so you can adjust your records and statements accordingly:

The Importance of tracking AAA and Earnings and Profits

Closing a business per the IRS

Dissolving an S Corp - Everything you need to know

@dnelson225 

[Rick19744]

@dnelson225 

The answer to your question is "No", the AAA does not need to be zeroed out.

This account just tracks undistributed income at the entity level and has no impact on the end result at the shareholder level where the ultimate gain or loss on the investment is determined.

Keep in mind, that the AAA is an entity level account and is not the same as a shareholder's tax basis; which is the key to determining the overall gain or loss.

Finally, any liquidating distributions should be reported on form 1099-DIV and not on the final S corporation return or K-1; which also means that these would not flow through the AAA either.