Schedule M-2, Analysis of Partner’s Capital Accounts is the section in Form 1065, U.S. Return of Partnership Income where the partnership reports to the IRS what caused the changes to the partners’ capital accounts on the partnership’s books and records.

Are Partners Capital Accounts retained earnings?

Capital Equity figure 2 Now, your retained earnings account is $0 and the partner capital accounts have the proper allocation of net profit to their respective capital accounts.

How are distributions handled on the 1120s schedule M-2?

1120S Sub S Corporate. What are some of the ways that distributions can be handled on the M-2? Distributions on the Form 1120S, Schedule M-2 are handled differently for different scenarios. Distributions are not allowed to result in a negative amount for line 8, although line 8 can be negative due to operating losses.

What are the rules for calculating schedule M-2?

The distributions are limited due to the ordering rules under Reg 1.1368.2. These rules are as follows for Schedule M-2, Column a: The balance at the beginning of tax year, line 1 is either zero or the balance carried forward from line 8 of the previous year. Due to prior year losses and reductions, the amount on line 1 can be negative.

Can a 1120s be negative on the M-2?

The AAA (Column A on the M-2) cannot be negative as a result of distributions. It can be negative if it arises from losses. The 1120S does not work like an 1120; Line 1 of the M-2 may, or may not, not match line 24b of the Schedule L. Column B of the M-2 cannot be negative.

Where does Form 1120S carry different amounts than schedule K?

Distributions reported on Line 7 of the Schedule M-2, Form 1120S may carry differently than the amount entered on the Schedule K, Line 16d. The distributions are limited due to the ordering rules under Reg 1.1368.2. These rules are as follows for Schedule M-2, Column a: