Question

Which item has no effect on an S corporation's AAA?

1) Capital loss.
2) Cost of goods sold.
3) Interest expense.
4) Stock purchase by a shareholder.
5) All have an effect on AAA.

Answer 1

The purchase of stock by a shareholder has no effect on an S corporation's Accumulated Adjustments Account (AAA), as it does not impact the corporation's income or deductions that affect shareholders' tax returns.The correct option is 4.

Step-by-step explanation:

The Accumulated Adjustments Account (AAA) is specific to S corporations and represents the corporation's undistributed taxable income that has been previously taxed to shareholders and can be distributed in the future without triggering a double tax. When assessing the impact on AAA, certain items do and do not affect it.

Capital losses, cost of goods sold, and interest expense all have effects on the AAA as they are relevant to the corporation's taxable income calculation. However, the purchase of stock by a shareholder does not directly affect the AAA. The AAA is only impacted by items that alter the corporation's income or deductions that pass through to shareholders' individual tax returns.

Therefore, the correct answer to the question of which item has no effect on an S corporation's AAA is: 4) Stock purchase by a shareholder.