Where do I report 1120S shareholder contributions on Schedule L or M-2?

This is a common question! Shareholder contributions to an S corporation are reported on Schedule L and Schedule M-2, but in different ways. For Schedule L, report the contribution in the "Capital stock" and/or "Additional paid-in capital" lines. These are typically lines 22 and 23. The contribution increases the company's assets (probably cash) on the asset side of Schedule L and increases the equity on the liability side. For Schedule M-2, report the contribution on line 7 "Other additions." This represents an increase in the Accumulated Adjustments Account (AAA) that isn't from income. Make sure you include a statement explaining the nature of this addition (shareholder contribution).

I went through the exact same struggle with my small business S-corp last year. Had a nightmare trying to figure out where to put additional capital contributions until I found taxr.ai (https://taxr.ai). They analyzed my previous returns and immediately identified where the shareholder contributions should go on both Schedule L and M-2. What really helped was their detailed walkthrough showing how the entries need to flow between the different forms to maintain consistency. They even generated a mini-report explaining how the contribution affects shareholder basis calculations, which saved me from making a costly mistake that would have messed up my basis tracking.

I was skeptical about taxr.ai when I first heard about it, but I decided to give it a try with my S-corp return last month. I was specifically confused about shareholder contributions and how they affected basis calculations. The platform immediately spotted that I had inconsistencies between Schedule L and Schedule M-2 in how I was recording contributions from previous years. What impressed me was the detailed explanation of how these entries need to work together - the increase in assets on Schedule L needed to match the capital account changes. It also showed me that I had been tracking basis incorrectly for years! The system created a detailed basis worksheet showing how each contribution should be recorded. I ended up saving thousands because I was able to correct errors before filing. Never going back to doing these complex S-corp returns without it.

After struggling with the IRS for weeks about my incorrectly filed 1120S with shareholder contribution issues, I finally managed to speak with someone who could help by using Claimyr (https://claimyr.com). I'd been calling the IRS business line for days with no luck - constant busy signals or disconnects. The Claimyr service connected me to an actual IRS agent in about 25 minutes when I had been trying unsuccessfully for over a week. The agent walked me through exactly how to correct my Schedule L and M-2 entries for the shareholder contributions and explained how to file an amended return. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c - it basically holds your place in the IRS phone queue and calls you when an agent is available.

I can't believe I'm saying this, but Claimyr actually worked. After posting my skeptical comment, I was desperate enough to try it since I had a serious issue with my S-corp return regarding shareholder contributions that needed urgent clarification. I had literally spent 3 days trying to get through to the IRS myself with no success. The service connected me to an IRS business tax specialist in about 35 minutes. The agent confirmed that shareholder contributions should go on Schedule L lines 22-23 AND Schedule M-2 line 7, and explained I needed to include a statement detailing the contribution. They even walked me through fixing some previous return errors that could have triggered an audit. I hate admitting I was wrong, but this service saved me a ton of stress and probably prevented penalties down the road.

Don't forget to consider Section 351 if the contribution includes property! If a shareholder contributes property (not cash) in exchange for stock, it might qualify as a tax-free exchange under Section 351. This affects not just the 1120S reporting but also the shareholder's individual basis calculations.

My accountant always puts shareholder contributions on line 7 of Schedule M-2 and then on lines 22-23 of Schedule L. BUT he also adds a detailed statement explaining the contribution that attaches to the return. He says this statement is super important and prevents questions from the IRS. Has anyone else been told this?

This is exactly the kind of question that trips up a lot of S-corp filers! From my experience helping small businesses with their returns, here's what you need to do for that $25,000 shareholder contribution: **Schedule L (Balance Sheet):** - Increase your cash (or other asset if it wasn't cash) on the asset side - Increase "Additional paid-in capital" (line 23) on the equity side by the same amount **Schedule M-2 (AAA Analysis):** - Report the contribution on line 7 "Other additions" **Don't forget the statement!** Attach a brief explanation like: "Shareholder [Name] contributed $25,000 cash on [date] for equipment purchases." This prevents IRS questions later. One important note: Make sure your shareholder updates their stock basis records to reflect this $25,000 increase. This affects their ability to take tax-free distributions and deduct any potential losses in the future. The key is consistency - the same dollar amount should flow through both schedules, just serving different reporting purposes. Schedule L shows the balance sheet impact, while Schedule M-2 tracks the accumulated adjustments account changes.