I will greatly appreciate if someone would answer my question on Schedule M-2 of form 1120S
I am a sole shareholder of S corporation which was formed as such in
2004. My contributed capital is $ 80,000
In 2004 I had a loss of $10,000 which appeared on line 24 of schedule M-1 as negative retained earnings and also on line 8 of Schedule M-2 (column a ) as ending balance of AAA. I had no distributions in 2004.
In 2005 I incurred an additional loss of $ 2,000 and also took out $5,000 as cash distribution
The cash distribution in 2005 decreased my contributed capital on the balance sheet (Sch L ln 23)to $75,000 and the $2,000 loss has increased retained loss on line 23 to $ -12,000
How should I complete Schedule M-2 for 2005? If I show $ 5,000 distribution on line 7 then it will increase the negative balace of AAA . I understand that only losses can increase a negative balance in AAA but not distributions. If this is true then should I enter only the loss of $2,000 on line 5 and make no entry for distribution. This way my AAA and Retained Loss balance will match. My next question is that do these two account balances have to match?