I would not make a such an adjustment. The previous year's tax return must be amended.
Distributions are reported on line 16 of the Schedule K-1 (Form 1120-S) code D.
Determine the taxability of the distribution by reporting the distribution on line 6 of the IRS form 7203 S Corporation Shareholder Stock.
If a previous year's IRS form 7203 is incorrect, that previous year's tax return and all subsequent years tax returns should be amended and the attached IRS forms 7203 corrected.
In addition, the Federal 1040 tax returns of the owner(s) may need to be corrected and amended.
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