1120S Schedule M2



I will greatly appreciate if someone would answer my question on
Schedule M-2 of form 1120S

I am a sole shareholder of S corporation which was formed as such in
2004. My contributed capital is $ 80,000

In 2004 I had a loss of $10,000 which appeared on line 24 of schedule
M-1 as negative retained earnings and also on line 8 of Schedule M-2
(column a ) as ending balance of AAA. I had no distributions in 2004.

In 2005 I incurred an additional loss of $ 2,000 and also took out
$5,000 as cash distribution

The cash distribution in 2005 decreased my contributed capital on
the balance sheet (Sch L ln 23)to $75,000 and the $2,000 loss has
increased retained loss on line 23 to $ -12,000

How should I complete Schedule M-2 for 2005? If I show $ 5,000
distribution on line 7 then it will increase the negative balace of AAA
.. I understand that only losses can increase a negative balance in AAA
but not distributions. If this is true then should I enter only the
loss of $2,000 on line 5 and make no entry for distribution. This way
my AAA and Retained Loss balance will match. My next question is that
do these two account balances have to match?


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