S-Corp Instructions 2021 Updates, PPP Forgiveness Reporting

[G2R]

Just reading up on the 1120S instructions updates. Found this summary which quotes the 1120S instructions.  To Read the Entire Article, Click Here

Quote

 

In the draft instructions for the 2021 Form 1120-S, the IRS has now stated their position—and it agrees that such expenses do not reduce the accumulated adjustments account.  Page 45 of the 2021 draft Form 1120-S instructions provides:

An S corporation should include tax-exempt income from the forgiveness of PPP loans on line 3 and report expenses paid with PPP loans that are forgiven on line 5 in column (d) of the Schedule M-2.[5]

Thus, returns prepared using the default treatments provided by most tax software will have understated AAA and overstated OAA for S corporations who received PPP loans and have treated the loan as forgiven when filing the 2020 S Corporation income tax return.

Revising this calculation should not require formally amending the 2020 S Corporation return, since the amount of AAA at the beginning of 2021 is not required to agree with that shown on the 2020 return by any provision of the IRC. Rather, the IRC simply requires that the S corporation use the proper amount of AAA to determine the tax status of any distributions.

If distributions in 2021 did not exceed AAA this adjustment would be all that is necessary to correct the reporting.

 

The words in red were written under column (d) instructions for the 1120S so I'm not understanding how this corrects the reporting on M-2 column (a) being understated.  Are we suppose to add the PPP forgiveness to line 3 of column (a)?

[WBR]

I would agree unless the distributions exceeded the AAA balance on the originally filed return then I would recommend filing an amended 1120S return for 2020, amending the 1099-Div and amending the shareholder’s personal return. I would also agree with your schedule M-2, line 3, column (a). Not sure what description I would use.

[G2R]

On 1/15/2022 at 9:53 AM, WBR said:

I would also agree with your schedule M-2, line 3, column (a). Not sure what description I would use.

Thanks!  It'd be nice if the instructions clearly stated column (a), line 3 for the adjustment.  Do you see another way the understatement is corrected?

[WBR]

Final 1120-S Instructions for 2021

"Column (d). Other Adjustments Account
The other adjustments account is adjusted
for tax-exempt income (and related
expenses) and federal taxes attributable
to a C corporation tax year. After these
adjustments are made, the account is
reduced for any distributions made during
the year. See Distributions, later.

Tip

PPP loans. An S corporation
should include tax-exempt income
from the forgiveness of PPP loans in column (d) on line 3 of the
Schedule M-2.

An S corporation should report expenses
paid this year with proceeds from PPP
loans that were forgiven this year in
column (d) on line 5 of the Schedule M-2.

If column (a) on line 2 or line 4 of the
Schedule M-2 includes expenses paid
with proceeds from forgiven PPP loans, an
S corporation should report that amount in
column (a) on line 3 and in column (d) on
line 5 of the Schedule M-2.

If column (a) on line 1 of the Schedule M-2
includes expenses that were paid in a
prior year with proceeds from PPP loans
that were forgiven this year, an S
corporation should report that amount in
column (a) on line 3 and in column (d) on
line 5 of the Schedule M-2."

[G2R]

Thanks @WBR I'm glad they clarified it!

[G2R]

Question:

When preparing the K-1 schedule for an 1120S, so a SH can keep track of their basis, I think box 16 should have code B (other tax-exempt income) listed. Can someone confirm this?

[DevM]

you need to put it on Sch K (Page 3 of 1120S line 16B the amount that is forgiven. ATX program has been fixed to populate M1 Line 5a and M2 line 3 (Other additions)

[Robin Johnson]

So the PPP loan forgiveness is an addition item and with the ordering rules gets to take a distribution against this forgiveness even though the company has a loss overall for the year and no beginning AAA to support the distribution?  

[jklcpa]

22 minutes ago, Robin Johnson said:

So the PPP loan forgiveness is an addition item and with the ordering rules gets to take a distribution against this forgiveness even though the company has a loss overall for the year and no beginning AAA to support the distribution?  

The PPP tax-exempt income increases stockholder's basis.  It should be shown as an increase to Other Adjustments Account and doesn't add to AAA.

Ordinarily the distribution would reduce AAA but not below -0- (losses can), and then any distribution not offsetting AAA would then reduce OAA.

Did the distribution exceed basis?

 

[Robin Johnson]

Yes.  Totally.  They took a $33,000 distribution and have no basis.  Their tax exempt/ppp loan forgiveness is $71,000.  The software is not showing the distribution on line 7 of the M-2 AAA column but when it loads to their 1040 it is allowing the distribution due to the $71,000 ppp income.

 

[DevM]

you add Loan Forgiveness to AAA as other additions (i.e additional paid in Capital). If the EOY basis is still negative.. no Distribution.

If there is distribution it will go as carryover Loss.

[DevM]

5 minutes ago, Robin Johnson said:

Yes.  Totally.  They took a $33,000 distribution and have no basis.  Their tax exempt/ppp loan forgiveness is $71,000.  The software is not showing the distribution on line 7 of the M-2 AAA column but when it loads to their 1040 it is allowing the distribution due to the $71,000 ppp income.

 

It does show as distribution to Other Adjustment account.. so in your case it will show as distribution from 71K (Other addition).

Clink of line 7 (Distribution) M2 and you will see the flow.

[Robin Johnson]

[Robin Johnson]

If I reduce OAA by the ppp related expenses then there is no OAA availing for the distribution.  It should be a capital gain on the shareholder's 1040 but when it imports, I think due to the ordering rules, it allows them the distribution and also allows them a prior year carryover loss to the extent that the distribution was less than the PPP loan.  So confused.

 

[G2R]

50 minutes ago, jklcpa said:

The PPP tax-exempt income increases stockholder's basis.  It should be shown as an increase to Other Adjustments Account and doesn't add to AAA.

Hi JKLCpa, this confused me.  I thought the updated 1120S instructions actually does say to increase AAA. 

On 1/22/2022 at 3:59 PM, WBR said:

Final 1120-S Instructions for 2021

If column (a) on line 2 or line 4 of the
Schedule M-2 includes expenses paid
with proceeds from forgiven PPP loans, an
S corporation should report that amount in
column (a) on line 3 and in column (d) on
line 5 of the Schedule M-2.

If column (a) on line 1 of the Schedule M-2
includes expenses that were paid in a
prior year with proceeds from PPP loans
that were forgiven this year, an S
corporation should report that amount in
column (a) on line 3 and in column (d) on
line 5 of the Schedule M-2."

[G2R]

2 hours ago, DevM said:

you need to put it on Sch K (Page 3 of 1120S line 16B the amount that is forgiven. ATX program has been fixed to populate M1 Line 5a and M2 line 3 (Other additions)

Thanks Dev.  Do you know when ATX updated this?  I was just working on a return last night and didn't see the numbers flow as you've described. 

[Abby Normal]

1 hour ago, DevM said:

you add Loan Forgiveness to AAA as other additions (i.e additional paid in Capital). If the EOY basis is still negative.. no Distribution.

If there is distribution it will go as carryover Loss.

First off, basis can NEVER be negative. And distributions in excess of basis are capital gains to the shareholder.

[jklcpa]

2 hours ago, G2R said:

Hi JKLCpa, this confused me.  I thought the updated 1120S instructions actually does say to increase AAA. 

Yes, do that then if expenses are included in col a, lines 2 or 4 of the M-2.  That is what the instructions say to do.

[ILLMAS]

Has anyone seen a good YouTube video showing all the steps?  I seen a couple but they only talk about the exempt-income, k-1 and not really get into the details of reconciling the M-1, M-2 etc….

thanks 

[DevM]

On 2/17/2022 at 2:22 PM, G2R said:

Thanks Dev.  Do you know when ATX updated this?  I was just working on a return last night and didn't see the numbers flow as you've described. 

I think it was updated around 2/8

[newatx]

In ATX, the shareholder basis statement shows the ppp forgiveness say $10,000 as an addition to basis, however, the deduction amount, $10,000 (expense used to offset the forgiveness amount) entered in M2 OAA was not reflected in shareholder basis statement... Is it right?

Also, can someone please confirm if the K1 box 12 other deduction should show the expense used to offset the forgiveness? In this case, $10,000?

Thanks.

[G2R]

This is how mine flows thru.  Hope it helps.  Keep in mind, in my example below, the expenses paid for by PPP loan funds were expensed in 2020, while the forgiveness was given in 2021 so line 3 of the M-2 AAA column includes this fact.  In my example the PPP amount was $3250.

Also, to answer your question, I do not have K-1, box 12 data related to PPP. 

K-1 Basis stmt: 

M-2:  see below for how I entered these data points.

To get M-2 to populate:

K-1: