Now that the corporate tax extension deadline is past and we all prepared, signed and filed our 2012 1120-S IRS forms (yeah right!), I write to report some of my codified thoughts on Analysis of Accumulated Adjustments Account, Schedule M-3, Other Adjustments Account, and Shareholders’ Undistributed Taxable Income Previously Taxed. Or in tax speak the “AAA”.

Generally your corporation’s Accumulated Adjustments Account (AAA) is an account of the corporation. It belongs to the corporation, not to you the shareholder. If you have elected S-Corporation Status the AAA tracks the amount of undistributed income that has been subject to income tax at each respective shareholder’s marginal tax rate. Its treatment is similar in nature to the manner in which earnings and profits generally track a C corporation’s undistributed income.

The AAA became relevant in 1983, so if you formed your S-Corp any time then or later the first day of the first year your corporation is an S corporation the balance of the AAA is zero. Each year after that the AAA is adjusted under mandate. I’ll address how to adjust the AAA a bit later in the post.

The significance of the AAA is that it allows previously taxed but undistributed income to be distributed income tax-free to shareholders up to the value of the shareholder’s investment in the corporation. This can be a difficult concept to grasp and without adequate bookkeeping even more difficult to track.

Here’s why… Read More