1120S - Deductibility of PPP loan expenses

[JackieCPA]

Since congress has passed that expenses that were used from the PPP funds that were forgiven are still deductible and that the amount will increase their basis.  My plan was to put the PPP forgiveness amount on line 16b "other tax-exempt income", because a balance sheet has to balance.

Am I correct in thinking to place the forgiveness on that line? 

[Lion EA]

M-1 adjustment on the balance sheet.

[mircpa]

From what I understood I believe we have to exclude PPP money from line 1 gross income & no deduction for corresponding expense.

So why would M-1 adjustment come into picture ?

[Lion EA]

PPP funds are non-taxable income, so M-1 adjustment. Expenses paid with PPP funds ARE DEDUCTIBLE.

[mircpa]

This will be double dip -- the DEDUCTION

[Lion EA]

https://www.irs.gov/pub/irs-drop/rr-21-02.pdf reflects changes to law contained in the COVID-related Tax Relief Act of 2020, enacted as part of the Consolidated Appropriations Act, 2021 (Act), Public Law 116-260, which was signed into law on Dec. 27, 2020.

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[Lee B]

9 hours ago, mircpa said:

This will be double dip -- the DEDUCTION

Yes it is a double dip, which the Consolidated Appropriations Act made legal.

[DANRVAN]

20 hours ago, mircpa said:

This will be double dip

Actually it is not double dipping.  Consider this example:

Client had Sales of 90,000 and expenses of 60,000.  Received PPP OF 10,000 with forgiveness applied to 10,000 of expenses.

His  book income would be 100,000 less 60,000 = 40,000.

Prior to CAA 21, his taxable income would exclude the 10,000 of PPP and reduce deductible expenses by 10,000.  Therefore net taxable income would be 90,000 less 50,000 = 40,000.  The net effect of the CARES was to include PPP in taxable income by reducing expenses.  In that situation taxable income = book income.

Now under CAA 21, taxable income is 90,000 less full deductions of 60,000 = 30,000.  This results in taxable income that is 10,000 less than book income.  There is no double dipping; 10,000 received and excluded.

Hope this helps, this is how I explained it to a client.

[DANRVAN]

On 1/6/2021 at 12:39 PM, JackieB said:

congress has passed that expenses that were used from the PPP funds that were forgiven are still deductible and that the amount will increase their basis.

Something to watch for in an S-Corp is increase in OAA, which might limit amount of distribution treated as tax-free return of basis in stock.

[mircpa]

$ 10,000 PPP money received  but not included in income that means taxable income understated by 10,000 AND 10,000 expenses charged to income therefore total net effect of 20,000 of less taxable income. This is what I was talking about double dip.

[DANRVAN]

9 hours ago, mircpa said:

net effect of 20,000 of less taxable income.

It does not work that way.  When you exclude the 10,000 it reduces taxable income by 10,000.  If you also disallow expenses by 10,000, taxable income is increased by 10,000.  So it becomes a wash, taxable income = book income.   That was  the law prior to CAA 21.

[mircpa]

You don't have to include 10,000.00 in income, BUT allowed to take deduction of 10,000 so it is double DIP. Please see @Lion EA comment "PPP funds are non-taxable income, so M-1 adjustment. Expenses paid with PPP funds ARE DEDUCTIBLE"

[DANRVAN]

3 hours ago, mircpa said:

You don't have to include 10,000.00 in income, BUT allowed to take deduction of 10,000 so it is double DIP.

It is not double dipping, do the math!

 

21 hours ago, DANRVAN said:

Now under CAA 21, taxable income is 90,000 less full deductions of 60,000 = 30,000.  This results in taxable income that is 10,000 less than book income.  There is no double dipping; 10,000 received and excluded.

40,000 book income less 30,000 tax income = 10,000 reduction.

 

[JackieCPA]

Congress also stated that this PPP loan forgiveness will INCREASE a shareholders basis. If I just do a M-1 adjustment, it doesn't increase the shareholder's basis. That is why I thought of putting the forgiveness amount on line 16b "Other tax-exempt income". This will increase the shareholders basis and do an M-1 adjustment. 

[Abby Normal]

3 hours ago, JackieB said:

Congress also stated that this PPP loan forgiveness will INCREASE a shareholders basis. If I just do a M-1 adjustment, it doesn't increase the shareholder's basis. That is why I thought of putting the forgiveness amount on line 16b "Other tax-exempt income". This will increase the shareholders basis and do an M-1 adjustment. 

You increase basis by enter an other addition on the K1 basis section (for entities) and the basis worksheet for 1040's. BUT you'll still need an M-1 adjustment for the nontaxable income.

[BulldogTom]

Thank you all for this topic.   Did my first PPP M-1 yesterday.   It was cool to know that I know what to do even before I opened the software.   I put this post in my back pocket a couple months ago exactly for this client.

Appreciate you all and your willingness to participate.

Tom
Modesto, CA