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BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
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Experience:  Owner of a CPA firm
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when filing for an S-Corp What is the purpose of an M-1 and

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when filing for an S-Corp What is the purpose of an M-1 and M-2. Where are these numbers being generated from, especially concerning the M-2? what is the difference, if any, between the bank account balance and the accumulated account balance as it regards XXXXX XXXXX? (this S-corp was once a C-corp) Are we required to fill out the M1 and M2 every year after the C-corp becomes an S-Corp?
Submitted: 4 years ago.
Category: Tax
Expert:  BK-CPA replied 4 years ago.

You are required to fill out the M1 and M2 most likely, yes. We'll start with the M2.

 

If an S-Corp was never and never becomes a C-Corp, then the M2 is less important. Have a professional do this if possible, or get ready to read the instructions for Form 1120S, located here:

 

http://www.irs.ustreas.gov/pub/irs-pdf/i1120s.pdf

 

See page 37 of the .pdf file above. AAA (Accumulated adjustments account) is used to track the S-Corp's undistributed net income, but when taking distributions from the S-Corp, you may end up distributing the E&P (Earnings and profits) of your old C-Corp that have been retained by the S-Corp, so the tax treatment will differ. For the order of distributions, see page 38 and 39 of the .pdf file.

 

You may wish to know about an IRC Section 1368(e)(3)(B) election to distribute E&P first if applicable. IRC 1368(e)(3)(B) is here:

 

http://www.law.cornell.edu/uscode/26/usc_sec_26_00001368----000-.html

 

(3) Election to distribute earnings first

(A) In general An S corporation may, with the consent of all of its affected shareholders, elect to have paragraph (1) of subsection (c) not apply to all distributions made during the taxable year for which the election is made.

(B) Affected shareholder For purposes of subparagraph (A), the term "affected shareholder" means any shareholder to whom a distribution is made by the S corporation during the taxable year.

 

....

 

 

 

 

For the Schedule M1, these adjustments represent differences between book income and taxable income. There may be no differences (50% meals and entertainment expenses is one common adjustment). Notice that Schedule L, the balance sheet above Schedule M on Form 1120S, reads "Balance Sheet Per Books."

 

1120S is here:

 

http://www.irs.gov/pub/irs-pdf/f1120s.pdf

 

Let me know if there is something more I can clarify.

 

Thank you for your question.

BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 793
Experience: Owner of a CPA firm
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