How JustAnswer Works:

  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.

Ask Phillip B, EA Your Own Question

Phillip B, EA
Phillip B, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 642
Experience:  Practicing since 2004. Expert in 1040, small business, represent vs. IRS, & int'l tax mattters.
20877915
Type Your Tax Question Here...
Phillip B, EA is online now
A new question is answered every 9 seconds

Form 1120S - How to complete the Schedule M-2?This is the

Customer Question

Form 1120S - How to complete the Schedule M-2?

This is the first time am using this service so very sorry if dont know the right procedures.

The line 7 is for "Distributions other than dividend distributions" so is correct to leave this line blank if "other than dividend distributions" were not paid?

And what about the cash distributions? Is the line 2 minus line 5 considered as the cash distributions? And is required to follow a formal procedure to take the money?

And what if the only owner just was taking money (writing checks from the company's account to pay all his personal expenses) over the year? The total of that checks approximately equals the net income of the company.

And does the figures in this schedule affect the tax the owner must pay?

And the amounts in Schedule M-1 and M-2 need to match with some other in the Schedule L?

And what if nothing has been made in previous years and the total in line 6 shows a very big amount (the sum of net income from several years)?
Submitted: 1 year ago.
Category: Tax
Expert:  Phillip B, EA replied 1 year ago.
Thanks for using JustAnswer.com!

Line 2 will include the net income from your S-Corporation (Line 21 from page 1 of form 1120S).
Line 3 additions would include other taxable and tax exempt income (See Schedule K lines 1-10 of form 1120S)
Line 4 would be the loss (if any) from line 21 of page 1 on from 1120S.
Line 5 reductions would include any other negative amounts from lines 1-10 of schedule K from form 1120S, certain deductions, and non-deductible expenses (like personal expenses of a shareholder). (See lines 11 and 12, and line 16c of Schedule K) This needs to be expressed as a negative.
Line 6 is the sum of lines 1-5. The amount here needs should be above zero. If it is not above zero, you will not enter any of your distributions (cash or non-cash) in line 7.
Line 7 will be cash or non-cash distributions if up to the amount in line 6.)
Line 8 is the difference between subtracting line 6 and 7. This can't be less than zero.

The M-2 generally has no effect on what you are being taxed on. The shareholders are (in a majority of circumstances)only taxed on taxable income of the corporation. Those items include:

For a list of the taxable income items, see schedule K of the 1120S, lines 1-10.

If there are additional questions, please reply to this answer so that I may assist you further. If this answers your question, please rate my performance between OK and Excellent so that I may receive credit for my work. Thanks for your business.
Customer: replied 1 year ago.

Thank you for your response but I see that you did not read all my concerns.


 


Now I marked every concern with a letter.


 


*********************


 


The a) was partially answered



The form says "Distributions other than dividend distributions" so the cash distributions are not dividend distributions?


 


a) The line 7 is for "Distributions other than dividend distributions" so is correct to leave this line blank if "other than dividend distributions" were not paid?


 


***********************


 


The b) was not answered


 


b) And what about the cash distributions? Is the line 2 minus line 5 considered as the cash distributions? And is required to follow a formal procedure to take the money?


 


*****************************


 


The c) was not answered


 


c) And what if the only owner just was taking money (writing checks from the company's account to pay all his personal expenses) over the year? The total of that checks approximately equals the net income of the company.


 


*******************************


 


The d) was answered but now I have a question about that: If that schedule is not affecting the tax on, why is there? and what is its real purpose for?


 


d) And does the figures in this schedule affect the tax the owner must pay?


 


****************************************


 


The e) was not answered


 


e) And the amounts in Schedule M-1 and M-2 need to match with some other in the Schedule L?


 


*******************************************


 


The f) was not answered


 


f) And what if nothing has been made in previous years and the total in line 6 shows a very big amount (the sum of net income from several years)?


 


**********************************


 


As I told at the beggining: This is the first time am using this service so very sorry if dont know the right procedures.


 


If you feel that there is more than one question I have no inconvenient in an additional fee, but really need to understand how this schedule works.


 


Thank you.


 


 


 


 

Expert:  Phillip B, EA replied 1 year ago.
The a) was partially answered


The form says "Distributions other than dividend distributions" so the cash distributions are not dividend distributions?



a) The line 7 is for "Distributions other than dividend distributions" so is correct to leave this line blank if "other than dividend distributions" were not paid?

Answer: Although this line says "other than dividend", I had seen zero S-corp distributions that would not be entered here if the balance is not at zero after the other adjustments.


***********************



The b) was not answered



b) And what about the cash distributions? Is the line 2 minus line 5 considered as the cash distributions? And is required to follow a formal procedure to take the money?

Answer: No. Each line accounts for different items of income and expense (deductible and non-deductible). The sum of lines 2 though 5 determine what distributions will be entered in this schedule. However, the distributions that are taken may not match the actual distributions that were taken.

The Schedule M2 on Form 1120S is used to track the accumulated adjustments account (AAA) of an S-corporation. For an S-corporation that always remains an S-corp and does not otherwise merge into an S-corp with E&P (only S-Corps that were once operating as c-corps have E&P, not S-corps), the AAA may never be needed for anything. Nevertheless, it is suggested that Schedule M2 be filled out in case the need for an accurate AAA balance arises. Unlike the M-1, the M-2 doesn't (technically) have to reconcile to retained earnings or any other part of the return. The balance can tie to retained earnings on the balance sheet if you make sure distributions are not more than the AAA (accumulated adjustments account).


*****************************



The c) was not answered



c) And what if the only owner just was taking money (writing checks from the company's account to pay all his personal expenses) over the year? The total of that checks approximately equals the net income of the company.

Answer: The checks written from the corporate account that paid the shareholders personal expenses directly will need to be reported as non-deductible expenses on schedule K line 16c. Then that amount will be a Other Reduction on line 5 column A.

This may make the balance in column a, for AAA, zero. If this is the case, no distributions will be recorded in the M-2.



*******************************



The d) was answered but now I have a question about that: If that schedule is not affecting the tax on, why is there? and what is its real purpose for?



d) And does the figures in this schedule affect the tax the owner must pay?

Answer There is a catch that all S-Corp owners should know about. If distributions that were taken exceeded the shareholders' basis in the corp, as determined for each shareholder individually (shareholders are required to track their own outside basis in their S-corp shares/loans from year to year, as that does not appear on the Form 1120S or Schedule K-1), then there could be gain for the shareholders to recognize on the distributions. Negative AAA tends to implicate (not prove) that perhaps the shareholders' basis has been reduced to nothing also, even though not necessarily (it is possible for an s- corp to have negative AAA and a shareholder to have positive outside basis in his/her stock). That maybe one major reason that the IRS requests the M-2 is filed by all S-corps.

****************************************



The e) was not answered



e) And the amounts in Schedule M-1 and M-2 need to match with some other in the Schedule L?

Answer: The M-1 needs to reconcile the retained earnings account in the schedule L, the M-2 doesn't need to reconcile to either. The M-2 does take alot of information from schedule K and the line 21 net income from page 1 of the 1120S.



*******************************************



The f) was not answered



f) And what if nothing has been made in previous years and the total in line 6 shows a very big amount (the sum of net income from several years)?

That may not be accurate if distributions have not been recorded, but it is not a problem either.



**********************************

IRS code section 1368 may be helpful explaining this section as well. http://www.law.cornell.edu/uscode/text/26/1368

If this answers your questions, please rate my answer so I am credited for my work (bonus would be appreciated for the time). If not, let me know and I will opt out so another expert can help you further. We have highly talented professionals here, and I won't be offended.
Customer: replied 1 year ago.

I will see carefully all your answers tomorrow in the office and will be in touch with you.


 


Thank you.

Expert:  Phillip B, EA replied 1 year ago.
Okay.
Customer: replied 1 year ago.

Just one additional question in the letter c).


 


Is valid that the checks written for personal expenses of the owner can be handled as "draws" and not as non-deductible expenses?

Expert:  Phillip B, EA replied 1 year ago.
They should be treated as distributions or nondeductible expenses -- either way would work.

Let me know if there is anything else that I can do for you?
Customer: replied 1 year ago.

Thank you. The last question at this time. As I said at the beginning is the first time am using this service. The question is what additional bonus would be fair for your excellent job.

Expert:  Phillip B, EA replied 1 year ago.
Thank you. Any amount would be fine. Just remember to rate my performance so I get paid.
Phillip B, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 642
Experience: Practicing since 2004. Expert in 1040, small business, represent vs. IRS, & int'l tax mattters.
Phillip B, EA and 5 other Tax Specialists are ready to help you
Expert:  Phillip B, EA replied 1 year ago.
Thanks so much for your business!

JustAnswer in the News:

 
 
 
Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.
 
 
 

What Customers are Saying:

 
 
 
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
< Last | Next >
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
  • I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight. Bonnie Chesnee, SC
  • Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation. John Minneapolis, MN
  • Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with. Orville Hesperia, California
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C. Freshfield, Liverpool, UK
  • This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!! Alex Los Angeles, CA
  • Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult. GP Hesperia, CA
 
 
 

Meet The Experts:

 
 
 
  • Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
< Last | Next >
  • http://ww2.justanswer.com/uploads/KU/KUMI95/2013-9-30_195031_kumar.64x64.jpg Wallstreet Esq.'s Avatar

    Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
  • http://ww2.justanswer.com/uploads/CU/Cuttinggirl/2011-10-29_03719_wcrop2.64x64.jpg Wendy Reed's Avatar

    Wendy Reed

    Enrolled Agent

    Satisfied Customers:

    3052
    15+ years tax preparation and tax advice.
  • http://ww2.justanswer.com/uploads/CATax/2009-08-04_204548_Mark.jpg Mark D's Avatar

    Mark D

    Enrolled Agent

    Satisfied Customers:

    985
    MBA, EA, Specializing in Business and Individual Tax Returns and Issues
  • http://ww2.justanswer.com/uploads/IN/insearchoftheanswer/2013-8-16_0233_attorney.64x64.jpg Richard's Avatar

    Richard

    Tax Attorney

    Satisfied Customers:

    3229
    29 years of experience as a tax, real estate, and business attorney.
  • http://ww2.justanswer.com/uploads/MY/MyVirtualCPA/2012-7-5_44024_cookmegan1.64x64.jpg Megan C's Avatar

    Megan C

    Certified Public Accountant (CPA)

    Satisfied Customers:

    6121
    Licensed CPA, CFE, CMA who teaches accounting courses at Master's Level
  • http://ww2.justanswer.com/uploads/JG/jgordosea/2012-6-7_43138_GordosVeritas.64x64.jpg jgordosea's Avatar

    jgordosea

    Enrolled Agent

    Satisfied Customers:

    2783
    I've prepared all types of taxes since 1987.
  • http://ww2.justanswer.com/uploads/OZ/ozaukeecpa/2012-6-7_193219_Picture1croppedandshrunk.64x64.jpg MequonCPA's Avatar

    MequonCPA

    Certified Public Accountant (CPA)

    Satisfied Customers:

    2231
    CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.
 
 
 
Chat Now With A Tax Professional
Phillip B, EA
Phillip B, EA
Tax Professional
642 Satisfied Customers
Practicing since 2004. Expert in 1040, small business, represent vs. IRS, & int'l tax mattters.