A few comments on your question:
- The Sch M-2, also known as AAA, tracks S corporation income and losses that have been passed out to the shareholders.
- Your AAA can be negative, but only as a result of losses. Distributions cannot reduce the AAA below zero
- So make sure your AAA is accurate; by making sure that distributions did not contribute to the negative figure
- Your first question, "yes" the balance at the end of one year carries over to the beginning of the next year
- Your second question, "no" the negative balance in the AAA column does not represent prior losses which may have been disallowed. These are entity level losses. Any losses that are disallowed as a result of basis, at-risk, or passive activity rules is handled at the shareholder level.
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
