Question

Which, if any, of the following items decreases an S corporation's AAA?

1) Distribution from earnings and profits.
2) Section 1231 loss.
3) Expenses related to tax-exempt income.
4) Depletion in excess of basis.
5) None of these choices affects the AAA.

Answer 1

Distributions from earnings and profits, Section 1231 losses, and depletion in excess of basis all decrease an S corporation's Accumulated Adjustments Account (AAA).

Step-by-step explanation:

The Accumulated Adjustments Account (AAA) is a corporate tax term relevant to S corporations. It represents an account on the corporate books that tracks certain adjustments to the corporation's taxable income.

Specifically, the items that affect the S corporation's AAA include:

1. Distributions from earnings and profits will reduce the AAA, as they represent a return of income that has been taxed previously to the shareholders.
2. A Section 1231 loss, which is the loss from the sale or exchange of property used in the business, does decrease the AAA as it represents a tax deductible loss.
3. Expenses related to tax-exempt income do not reduce the AAA since they are typically disallowed for tax purposes.
4. Depletion in excess of basis reduces the AAA because it is a deduction that can exceed the property's adjusted basis, impacting the taxable income of the corporation.

Therefore, the correct answer is that 1) Distribution from earnings and profits, 2) Section 1231 loss, and 4) Depletion in excess of basis, decrease the S corporation's AAA, making option 5) None of these choices affects the AAA incorrect.