REG CPA Practice Questions: S Corporation AAA

Welcome to another reg walkthrough video

I'm Logan, and in today's video, we're going to be going over the S-Corporation Accumulated Adjustments

Account, or the AAA, and we're going to be doing that, the Superfast CPA way, which is diving

straight into questions to learn the material. If you don't know much about our strategies and you want to learn more, make sure you go to

superfast CPA.com and check out our free one-hour webinar training. We go over the key ingredients to passing the CPA exam

Again, it's only one hour, it's free, and it will save you so much time struggling with your

CPA exams. Make sure you go check it out. The link will be in the description. Also, if you like

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super fast CPA app, where we not only have audio notes and review notes, but also five question

mini quizzes that you can easily access on your phone all throughout the day to continue learning

With all that said, let's dive straight into the questions. All right, here is question one

Oak Leaf Corporation has elected S-corporation status at the beginning of the current

tax year. This is their first year of operation, so there is no beginning balance in

in the AAA. During the year, Oak Leaf Corporation reported the following. Ordinary business

income of $200,000, long-term capital gain of $50,000, tax-exempt interest income of $20,000

charitable contributions of $10,000, life insurance premiums for a policy on a key employee for $5,000

and distributions to shareholders of $100,000. Calculate the year-end balance of the accumulated

adjustments account, or the AAA for Oak Leaf Corporation. All right, if you don't really know what

the AAA is or you don't really understand it, that's okay. That's why we're here. Let's go

ahead and go straight into the answer to start learning how this works. Okay, and the answer is

$135,000. Let's learn about this. The AAA is designed to keep track of undistributed earnings

that have already been taxed to shareholders. This helps ensure that when distributions are

made to shareholders, they are not taxed again on these earnings. To calculate the AAA at the

end of the first year of operations for Oak Leaf Corporation, they start with the $0 balance

because it was the first year of operations. You add the ordinary business income

You add the long-term capital gain. You do not add the tax-exempt interest

and we'll talk about that in a little bit. You subtract the non-deductible charitable contributions

So tax-exempt, not included. Non-deductible is included because, again, with NS Corporation

those deductions do flow through to the shareholders. You subtract the non-deductible life insurance premiums

and distributions to shareholders would reduce the AAA if the AAA is positive Since the AAA before distributions is and the distributions are the AAA would be reduced by the amount of distributions

Therefore, after accounting for the distributions, you end up with $135,000 in the AAA

And then let's read this last bit here. The distributions to shareholders reduce the AAA, but do not impact the corporation's taxable

income or the shareholders' individual tax liabilities, assuming the shareholders have sufficient

stock bases to absorb the distribution. The shareholders have already been taxed on their portion of the corporation's income, even if they never actually received any money

All right, so basically, the AAA keeps track of how much money the S corporation has made over the years to make sure that they don't tax it again to the shareholders

Distributions do lower it, and we're going to talk a bit more about distributions in future questions

All right, let's go ahead and go to the next question. All right, here is question two. During the current year, Cedarwood Enterprises and S corporation reported the following financial activity

net ordinary business income of $300,000, short-term capital loss of $20,000, dividends from domestic

corporations for $15,000, tax-exempt municipal bond interest of $10,000, and distributions to shareholders

of $50,000. Assuming Cedarwood enterprises had no accumulated earnings and profits or E&P

and that would come into play if they were a C corporation previously, by the way

And a beginning AAA balance of $100,000 determined the AAA at the end of the current year

Okay, we just learned how to do this. could figure out how to do this one just based off of the previous one. So go ahead and pause the

video and when you're ready, come back and we will look at the answer to see if you got it right

Okay, and here is the answer, $375,000. To determine the end of year AAA balance for C to Wood

Enterprises, add the net increases from business income, capital gains, and dividends, and subtract

any losses and distributions. So we start with the $100,000, you add the $300,000 from business

income, you add the long-term capital gain, you subtract the short-term capital loss

you add the dividends received and then you subtract the distributions to the shareholders

and that leaves you with a AAA balance of $375,000. Okay, so it's pretty straightforward

once you know basically what it is and how it's calculated. We're going to do a couple more

questions just to show a couple more situations that happen with this. Let's go to the next question

Okay, here is question three. Vertex Consulting and S corporation had the following financial

activities during the current year. Net ordinary business loss of $50,000, a short-term capital

loss of long capital gain of dividends received for and non expenses related to entertainment of Assuming Vertex Consulting had a beginning AAA balance of

determine the AAA at the end of the current year. Okay, so the question here is, can the AAA go

negative? We don't know that yet, so let's go ahead and go to the answer to see how this works

Okay, and here is the answer. It's negative $50,000. So it can go negative. Let's

learn a little bit about it. To calculate the AAA at the end of the year for Vertex consulting

we start with the starting AAA balance of $20,000. We subtract the ordinary business loss

We subtract the short-term capital loss. We add the long-term capital gain. We add the dividends

received, and then we subtract the non-deductible expenses. Again, don't be tricked by non-deductible

That does still affect AAA. And that gives you the negative $50,000 triple A balance

All right, let's go to the final question for this video. All right, here is question four. Brighton Solutions and S Corporation had the following financial activities during the current tax year

Net ordinary business income of $100,000, long-term capital loss of $15,000, dividends from domestic corporations, $10,000, non-deductible expenses for $5,000

and distributions to shareholders of $120,000. Assuming that they had a $20,000 triple A balance at the beginning

we have to calculate the AAA balance for the end of the year. Okay, so in the previous question, we learned that it can go negative

but that didn't include distributions. Go ahead and pause the video, see if you can figure this out. However, there is a rule with distributions to shareholders and how it can affect the AAA. So when you're ready, come back and we will look at the answer. Okay, and the answer is $0.00. That's the ending AAA balance. So let's learn a little bit about that. So the starting AAA balance is $20,000 and, you know, we do all the normal stuff and that before distributions leaves you with a $110,000 triple A balance. But when you subtract a distribution

they can only take it to zero. And let's read about that

However, AAA cannot go below zero from distributions. The AAA is reduced to $0

and the excess distribution of $10,000 must be accounted for from other resources, such as reducing shareholders' stock bases

or treating it as a dividend from unaccubulated earnings and profits if it was previously a C corporation

Now, we're not going to be going over those things in this video. Just know that distributions to shareholders cannot reduce AAA below zero

It can go below zero from an ordinary loss but it cannot be reduced below zero from distributions to shareholders Now that does bring up the question what happens if the AAA is already negative and

shareholders want to take distributions? Again, it's the same thing here where they might be

able to take it, but it won't be coming from AAA. It will be coming from stock basis or accumulated

earnings and profits if it was a C corporation before. And that's how it works. All right, let's

finish out this video by doing one more part of the super fast CPA strategy, which is something

called pillar topics. Now, the idea behind pillar topics is, as you're going through the

questions to learn the material, you will notice the most important things that come up based

off the questions. You'll notice three or four topics that came up multiple times throughout the

questions, and you know that they are important according to your review course, and you need to know

them for the CPA exam. So let's go ahead and go over the pillar topics for this video

Okay, and here are the pillar topics. The accumulated adjustments account is essentially to keep

track of earnings and profits throughout the years to know what income has already been taxed to

shareholders so they are not taxed again. Things that increase AAA would be ordinary business

income and separately stated items. Basically everything that increases income, except for, of course

tax exempt income, we'll talk about that in a second. Things that decreased AAA would be

ordinary business losses, separately stated losses or deductions, non-deductible expenses, and distributions. And again, remember, distributions are the last part of the AAA calculation

each year and they cannot reduce it below zero, though business losses can reduce it below zero

And then finally, tax exempt income and the expenses related to it do not affect AAA

So that life insurance premium that was at the beginning of the video, potentially that could have

been tax exempt because a lot of times the income from life insurance disbursements is tax exempt

In the question, it did say it was non-deductible, so we're just going to follow that

but typically life insurance premiums are tax exempt, and the expenses associated with them are also not tax deductible

so they don't affect the AAA. All right, with all that said, that is the end of the video

Thank you so much for watching. If you liked this, make sure you go to superfast CPA.com

and check out our free one-hour webinar training. We teach the key ingredients to passing the CPA exam

It's something you don't want to miss. Also, if you'd like going through the questions to learn the material

make sure you check out our Superfast CPA app, where we have our five question mini quizzes that you can easily access on your phone all throughout

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I hope this was helpful, and I will see you in the next video