Where exactly do I enter capital contributions on Form 1120S and how does it impact Schedule K-1?

Capital contributions from shareholders don't appear in Box 16 of Schedule K-1. Box 16 is for distributions and withdrawals. Capital contributions should be reported on the balance sheet of Form 1120S. For the M-2 question, capital contributions should be reported on line 2 of Schedule M-2, which is specifically for "Other additions." This line is where you report increases to the AAA (Accumulated Adjustments Account) other than income. Make sure you're also tracking basis changes correctly since capital contributions increase a shareholder's basis in their S corporation stock.

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I think there's some confusion in this thread. Capital contributions should be reported on line 7 of Schedule M-2, not line 2. Line 2 is for income items that increase AAA but aren't included in ordinary income. Line 7 is specifically for "other adjustments" which includes capital contributions. That's been my understanding for 10+ years of preparing S-Corp returns.

Has anyone here had issues with capital contributions being flagged for review by the IRS? We made a significant contribution last year and our return got pulled for review.

I've been doing S-Corp returns for several years now and wanted to clarify the capital contribution reporting for anyone still confused. Capital contributions should be reported on Schedule M-2, line 2 "Other additions" as others have mentioned. This is correct. However, I want to emphasize something important that hasn't been fully addressed: capital contributions do NOT increase the Accumulated Adjustments Account (AAA). They increase the shareholder's stock basis and appear in the Other Adjustments Account (OAA) for tracking purposes. On the K-1, the capital contribution will show up in Section E (Shareholder's Capital Account Analysis) in the "Capital contributed during the year" column. This is separate from Box 16, which is for distributions. Also, make sure you update your corporate balance sheet to reflect the increased paid-in capital or additional paid-in capital account. The IRS will expect to see consistency between your M-2, K-1, and balance sheet entries. One last tip: if the contribution is substantial relative to your business size, consider keeping detailed documentation including bank records showing the transfer of funds. This can help avoid questions during any potential review.