It's the tax law.

ProSeries does not handle this situation well. I used PrSystem FX at my previous firm and that software would do a reconciliation between AAA and RE that automatically handled distributions in excess of AAA (not in excess of basis). The following year if you had an increase in AAA, it would automatically decrease the timing difference. I've been overriding the distributions on the M-2/Retained Earnings worksheet in ProSeries for years, both in the years that the distributions exceed AAA and again in the years when net income exceeds current distributions to reverse the timing difference.

Have you found any other solution to correct this?  It is very frustrating that proseries limits distributions to AAA (when there is sufficient stock basis). 

Distributions are not limited to AAA. They are limited to stock basis in order to be tax free.  But proseries is limiting them to AAA without an override. 

It is my understanding that distributions cannot reduce AAA to below zero, but they are not limited by AAA. AAA is only relevant to determine if a distribution is taxable as a dividend in the case the entity was formerly a C Corp and had accumulated E&P.

in the case that it has always been an S Corp the only relevant measure to determine the if the distribution is taxable is stock basis. 

Correct. But you can't make AAA negative on the 1120S by distributions.

No one said distributions are limited by AAA. They can be anything the shareholders want. But there may be adverse tax consequences if they take too much..

No, ProSeries has not fixed this issue. 

When I have distributions in excess of AAA, I still use overrides on the M-2/Retained Earnings Worksheet to reconcile RE to AAA. I also keep an Excel spreadsheet to help me keep track of the cumulative timing differences from one year to the next to make sure AAA is correct when the distributions in excess of AAA are restored.