Video: Accumulated Earnings and Profits vs. Accumulated Adjustments Account

Tax planning for S corporations involves strategizing to optimize the tax liabilities of these entities which, by design, pass corporate income, losses, credits, and deductions to their shareholders for federal tax purposes. Effective planning requires understanding the specific tax implications of distributions, compensation, and business expenses, ensuring compliance with the complex regulations governing these pass-through entities.

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Video Transcript

Instructor: Nick Palazzolo

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All right, all right, getting to our AEP and AAA accounts. Now, when an S Corp makes distributions to its shareholders, the source of the distribution, right, yes, you have money, but of course we have accounting, and within accounting there are various accounts you could pull from, whether it's accumulated earnings and profits or the AAA account, we've got distinct triple, distinct AAA, distinct tax implications. Let's talk about the implications of a contemplated election to treat distributions as being made from AEP rather than AAA. So we've got both of these accounts for background here, an S Corp with both AEP, which is essentially your retained earnings from when you were a C Corp, and then your AAA account, which just for our simple purposes, obviously we go through this a lot more in depth in our other lessons that go over S Corps, but essentially your AAA account is kind of like your retained earnings for the S Corp. So it's important to distinguish between these two because think about it, over the course of a, maybe 100 years, a corporation could be a C Corp, then an S Corp, then a C Corp, then an S Corp. It's important to track all of this and understand where the money's coming from, being distributed from, because money earned while it's a C Corp is treated differently than money earned while it's an S Corp, so you definitely want to understand that difference there. So the corporation is contemplating making a distribution to the shareholders, but we obviously have a pool of money from the AEP and the AAA. Even if it's in the same bank account, you want to make sure you have records of what amount is the AEP and what is the AAA. Now the

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S corporations

Module: 3 Concepts, 35 Videos

S Corporations: Eligibility and Election Overview

3:48

Introduction to S Corporations: Eligibility and Election

2:21

Shareholders of an S Corporation

4:57

S Corporation Eligibility Requirements