we can't say whether the prior returns correctly reflected the balances in M-2. we don't know the full history of the corp so to providing correct info may not be possible.
IRC section 1368 says that distributions can't reduce the AAA to a negative amount but in determining if they do, net negative adjustments for the current year are ignored ( negative adjustments would occur if the net of lines 2 tkrough 5 were negative ) but in your case they're positive
1368 in part
In applying this section to distributions made during any taxable year, the amount in the accumulated adjustments account as of the close of such taxable year shall be determined without regard to any net negative adjustment for such taxable year.
(ii)Net negative adjustment
For purposes of clause (i), the term “net negative adjustment” means, with respect to any taxable year, the excess (if any) of—
(I)the reductions in the account for the taxable year (other than for distributions), over
(II)the increases in such account for such taxable year.
so it seems for the AAA a/c line 7 should not exceed line 6
and from the example in the instructions the OAA account should not go negative either
this is from the 1120S instructions
For the other adjustments account, the worksheet line 3 amount is the Schedule K, line 16a, tax-exempt interest income of $5,000. The worksheet line 7 amount is $5,000, reducing the other adjustments account to zero. The remaining $60,000 of distributions aren't entered on Schedule M-2. (the example specified 16D of schedule K was $65,000. the taxpayer's basis would still be reduced by the $60K and if it goes negative he has capital gain
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in the example, the AAA and OAA were zero at the beginning of the year. the AAA has net negative adjustments for the year. starting out with a zero balance, net negative adjustments for the year being ignored, distributions would reduce AAA to a negative which is not allowed.
