How to properly account for AAA on an 1120-S return with a $3,500 loss?

Thanks for explaining this! I've got a similar situation but with multiple shareholders. Does the AAA get tracked separately for each shareholder or is it one account for the whole S-Corp? And if a shareholder sells their interest, does their portion of a negative AAA transfer to the new owner?

The AAA is a corporate-level account that belongs to the S corporation as a whole, not to individual shareholders. It's essentially one pot for the entire company, regardless of how many shareholders you have. If a shareholder sells their interest, the AAA doesn't transfer specifically to the new owner in portions. The AAA balance remains with the corporation. The new shareholder simply steps into the position of the old shareholder with respect to their percentage of ownership in the company, which includes their proportional interest in the existing AAA balance.

Did you try calling the IRS about this first? I've heard mixed things about these online tax tools, especially for S-Corp stuff which is complicated. How do you know their guidance was correct?

How long did the analysis take? I've got a similar situation but with a couple other complications - multiple years of small losses and then one good year. Would it handle something like that?

I did try calling the IRS first but got stuck on hold for over an hour before giving up. The taxr.ai analysis took about 10 minutes once I uploaded my documents, and the explanation matched exactly what my accountant friend later confirmed when I checked with him. The tool definitely can handle multiple years of data. That's actually one of the things I found most helpful - it looked at the pattern across my returns and identified where I had been inconsistent with my AAA tracking across years. It showed me how the losses should carry forward properly.

Wait, how does this actually work? Does someone else talk to the IRS for you? Because that seems like it would be a problem with privacy and authorization.

This sounds too good to be true. The IRS phone lines are notoriously impossible to get through on. I've spent literally DAYS trying to reach someone about my 1120-S issues. Are you sure this isn't just paid advertising?

They don't talk to the IRS for you - they navigate the phone tree and wait on hold, then when an actual IRS agent picks up, they transfer the call directly to you. So you're the one who actually speaks with the IRS representative. No privacy issues since you handle the actual conversation. I was extremely skeptical too. I had spent over 20 hours across multiple weeks trying to reach someone at the IRS about my S-Corp issues. With Claimyr, I was connected to an IRS specialist in about 15 minutes. It works because they have a system that efficiently navigates the IRS phone system and holds the line for you.

You're bringing up a good point about the interaction between different accounts. When an S corporation has Other Adjustments Account (OAA) or Previously Taxed Income (PTI), there is indeed a specific ordering rule for how distributions and losses affect these accounts. Losses first reduce the AAA before affecting other accounts. So if you have a loss like the OP's situation, it reduces the AAA first, and only if the loss exceeds the AAA balance would it then potentially affect other accounts. The ordering rules for distributions are more complex - AAA is distributed first, then PTI, and finally OAA.

Thanks for bringing this up! My S-Corp is pretty straightforward and doesn't have those other accounts yet, but it's good to know about this complexity for the future. Does QuickBooks track these different accounts automatically or is this something you need to manually keep records of?

QuickBooks doesn't automatically track AAA, OAA, or PTI accounts properly in my experience. You really need to set up separate ledger accounts and maintain them manually or with specialized S-Corp tax software. Regular accounting software just isn't designed to handle these tax-specific tracking accounts.

Did they actually audit you for this or just send a correction notice? I've been doing my own 1120-S returns for three years and honestly have never filled out the AAA section... now I'm worried.

@Luca Ricci You should definitely start tracking your AAA properly! It wasn t'a full audit in my case - just a correction notice asking me to file an amended return with the AAA section completed. But the IRS agent warned me that consistently leaving it blank could trigger more scrutiny later, especially when you start taking distributions. The AAA account is required reporting for S-Corps, not optional. Even if you ve'been getting away with it for three years, it s'better to correct this going forward. You might want to consider amending your previous returns to include the AAA tracking, or at least make sure you start doing it correctly from this year forward.

Great question about basis vs AAA! These are actually tracked separately and serve different purposes. The AAA is a corporate-level account that tracks the S-Corp's undistributed earnings and losses, while shareholder basis is tracked at the individual shareholder level. Your negative AAA balance doesn't directly affect the shareholders' stock basis calculations. Shareholders track their own basis separately based on their initial investment, additional contributions, their share of income/losses, and distributions received. However, both are important for different reasons - basis determines how much loss a shareholder can deduct on their personal return, while AAA determines the tax treatment of future corporate distributions. So you'll want to make sure you're tracking both correctly!

This is exactly the kind of detailed guidance I was hoping to find! As someone new to S-Corp filings, it's reassuring to hear from an experienced preparer that I'm on the right track with maintaining the AAA from day one. Your point about keeping detailed records is especially helpful - I'll make sure to document all my AAA calculations clearly. The distinction between what goes to AAA versus Other Adjustments Account is something I hadn't fully considered, so I appreciate you pointing that out. One follow-up question: when you mention that AAA is restored "dollar-for-dollar" before distributions are treated as tax-free return of capital, does that mean if I have a $25,000 profit next year, the first $4,700 essentially goes to bringing the AAA balance back to zero, and then the remaining $20,300 would be available for tax-free distributions up to shareholders' basis? Thanks for taking the time to share your expertise - it really helps us newcomers navigate these complex requirements!