On form 1120S Schedule M-2, how is #7: Distributions other than dividend distributions calculated? Where is the information/ calculation derived from?

[Rick19744]

In general, the distributions reflected on this line will agree to the total of all shareholder K-1 distributions.

However, the AAA column which tracks income and losses passed out to shareholder's, cannot go negative as a result of distributions.  So if this happens, distributions reflected on Sch M-2 line 7 will not agree to the total of the combined distributions reflected on the K-1's.

A simple example: let's say Sch M-2 is $1,000 and there were $1,500 in total distributions to the shareholder's (which the prorata distribution is reflected on the respective K-1).  Line 7 of Sch M-2 will only show $1,000; since the AAA cannot go negative or more negative as a result of distributions.

If Sch M-2 line 6 was a negative $1,000 and there were $1,500 in total distributions to the shareholder's, then line 7 will be blank; as the AAA cannot go negative or more negative as a result of distributions.

[XrayDoc88]

I experienced this exact situation with my 2018 1120-S return.  I unknowingly made distributions to two shareholders that exceeded line 6 of Sch M-2.  The program then listed my distributions as the line 6 value, instead of my actual distribution total, giving me a zero AAA balance.

1. Even though the balance is listed as zero, does the program secretly carry forward a negative balance to use for the next year's M-2 calculation?  My 2019 M-2 showed a starting balance of zero, not negative.

So I have another question/problem.  My 2019 Sch M-2 was filled out by TurboTax Business and showed an AAA balance at the end of the year.  However, my 2020 Sch M-2 and My 2021 Sch M-2 are completely blank.  TurboTax Business did not carry any information forward from 2019 and basically failed to complete these M-2 schedules.

2.  Why would this have happened?  Can I force TurboTax to fix this?  Can I manually correct these M-2 forms for the last two years?

Thanks!

[AliciaP1]

I'll answer by your question numbers:

1. No, basis/equity cannot be negative for an S-Corp so the system stops tracking at $0 until you earn income to increase the amount
2. Unless you are required to report the forms with your balance sheet, you do not need to do anything.  You can manually track (outside TurboTax) the information based on your 2020 return and enter your beginning balance for 2021 (ending balance from 2020) in forms mode.

To get to forms mode and change the amount please follow these steps:

1. Within your tax return use the Forms icon in the upper right of the screen to switch to forms mode
2. Select Form 1120S p3-5 from the list on the left
3. Scroll down to the Schedule M-2 section
4. Ensure the Yes checkbox is selected for the Compute Schedule M-2? line
5. You can also select Yes for the If Yes, use automated ScheduleM-2/Retained Earnings Worksheet amounts? line
6. Scroll down and enter your 2021 Balance at beginning of tax year amount in column (a)

@XrayDoc88

[Raeka]

I need to enter a negative number on Line 7 of M-2. I'm trying to correct an incorrect entry on my balance sheet which shows the security deposits $45 less than they should be. I need to increase the *negative* retained earnings balance by $45. I have not been able to figure out how to do that. I was told to put in correct security deposit on Schedule L at line 18 and then report it on M-2 as a draw/distribution. But the program will not allow me to do that. Line 6 is a negative number. Our Schedule Ks are negative (show losses). What am I to do to get my balance sheet in balance if I can't enter a distribution on Line 7 of M-2 to increase the Liabilities section?

[RobertB4444]

@Raeka  I'm not sure why your security deposits number is off but a security deposit is either a short term or long term liability depending on the length of the lease.  Just add $45 to one of those amounts and you'll be all set.