What does accumulated adjustments account mean on the CPA exam?
Accumulated adjustments account. The running total of an S corporation's post-election taxable income less distributions. It tracks what can be distributed tax-free ahead of any earnings from C corporation years.
Defined against Sec. 1368(e).
Which CPA exam sections use accumulated adjustments account?
Accumulated adjustments account appears in the TCP section of the CPA exam.
What is the difference between accumulated adjustments account and accumulated earnings and profits?
AAA tracks the S corporation’s own undistributed taxed income. E&P is the C corporation residue carried into S status. A distribution from an S corporation with E&P runs AAA first, then dividend out of E&P, then remaining basis, then capital gain. The dividend layer never touches stock basis, which is the step candidates lose. (IRC Sec. 1368)
Other names for accumulated adjustments account
AAA
Related terms
- C corporation: A corporation taxed in its own right under subchapter C.
- accumulated earnings and profits: The C corporation earnings and profits an S corporation carries into S status.
- taxable income: The figure the tax rates are applied to: gross income, less the deductions the Code allows.
- S corporation: A corporation that elects to be taxed like a partnership, so profit is taxed once in the shareholders' hands.
- net operating loss: A year in which allowable deductions exceed gross income.
- deferred tax liability: The deferred tax consequences of taxable temporary differences: income already in the books that the return has not taxed yet, or a deduction taken on the return ahead of the books.