I may have been thinking too long about this one.  If we follow the IRS new guidance in the ERC FAQs updated in March 2025, we can treat an ERC refund received in the current year as "Other Income" on the tax return (assuming we have not previously amended returns to reduce wage expense).

Treating ERC refund in current year as other income will increase the net income of the S-Corp this year and increase the Shareholder Basis.   This will result in an increase in the AAA account (due to the increase in net income).

Under the previous method (amending the 2020 or 2021 tax return to reduce wage expense for the amount of ERC claimed), we would report the actual receipt of the refund as tax-exempt income in the year received.  Treating it as tax-exempt income would result in an increase to the OAA account rather than AAA.

So, does the new method allowed by IRS (reporting as other income) shift the ERC refund amount from the OAA account to the AAA account on the 1120-S?    Or, have I been doing this wrong all along by treating the receipt of the refund check as tax exempt income?