S Corp received roughly $35,000 in PPP loans in 2020, and no repayments have been made (deferred for 2 years). The business has not yet applied for forgiveness, but anticipates 100% forgiveness. In addition, Congress passed into law the ability to fully deduct expenses paid by forgiven PPP loans, but not sure if that is relevant in this case.
How/Where should this PPP loan be reported on Form 1120-S / Balance Sheet?
Clearly you have an increase (debit) in cash on the asset side and need to increase (credit) a liability account on the liability/shareholders' equity side (most likely notes payable in one year or more or other liabilities).
I have a similar problem. My loan was granted and forgiven in calendar year 2020 so I consequently do not have any long or short term debt. I'm not sure how to categorize the loan deposit on the income side or how to handle the funds on the balance sheet.
You deposit cash for the loan amount when you receive it and credit other income if you believe the loan will be forgiven. When you complete your tax return, you complete schedule M-1 that will reconcile your book income to the income reported on your tax return. Those adjustments will flow down to schedule M-2, which will reconcile your equity as reported on your financial statement to that reported on the tax return.
My PPP loan is in process being forgiven. so obviously it wont affect my filing this year. so do I just enter my PPP loan amount in the other income section of turbo tax business? I was also given an EIDL grant by the SBA of 1000.00 Do I also enter that in the other business income section and specify what it is?
Thanks
If you think the PPP loan will be forgiven, then you won't report it as taxable income in TurboTax. You would report it on line 16(a) as Other Tax-Exempt Income if you are filing a form 1120-S. It would appear on your financial statement as either loan payable or other income, so there may be a reconciliation issue if you report your balance sheet on your tax return. This will be handled by the entries in Schedule M-1 and M-2 in TurboTax and on your corporate income tax return.
The EIDL grant is normally taxable, but there may be more guidance on that by the IRS in the near future. You would enter it as other income in TurboTax, if it is taxable.
[Edited 1/25/21 1:31PM PST]
I have been able to get my Balance Sheet to balance, but I now have a hugely negative number for Retained Earnings. My business, not accounting for my PPP loan did incur a loss for the year, but the negative retained earnings are far more than the loss we incurred, and we had positive retained earnings last year. What could I have done wrong?
@MZVA wrote:
What could I have done wrong?
Did you make any distributions (of cash or property) during the tax year?
Yes, due to the PPP loan, we were able to make cash distributions, despite the loss on the books.
How did you report the PPP loan on line 16(a) as Other Tax-Exempt Income? Or did you report it in some other way?
Do Retained Earnings appear to be decreased by the amount of your PPP?
@MZVA wrote:
Yes, due to the PPP loan, we were able to make cash distributions, despite the loss on the books.
Yes, the cash distributions will cause a corresponding decrease in your retained earnings.
It is on schedule M-1 line 16-b as other tax-exempt income and also on line 16-c as nondeductible expenses. I also had to enter it as other liabilities on the balance sheet. Is that correct?
My business is very small so I am not required to file a balance sheet. So will I have to file a balance sheet now? Also the EIDL was called an advance and it was only 1000.00 and I know all of those were being forgiven.
See Line 11 on Schedule B.
You do not have to file a balance sheet (Schedule L) if:
a) The corporation’s total receipts for the tax year were less than $250,000, and
b) The corporation’s total assets at the end of the tax year were less than $250,000.
I have an S-Corporation and the forgiven loan, in conjunction with cash distributions, also resulted in a reduction in retained earnings for me. It is my understanding that starting last year the IRS required stock holders in an S-Corp to disclose the “basis” in their stock on their personal tax returns in association with imputing their K-1 information. Turbo tax did not prompt me to do that last year so I will be looking into how to accomplish that this year. It looks to me like the amount of the forgiven loan essentially reduces my stock basis by a similar amount so I will ultimately pay taxes on this forgiven loan amount some time down the road when I sell or dispose of the corporate stock.
@GaryRichards wrote:It is my understanding that starting last year the IRS required stock holders in an S-Corp to disclose the “basis” in their stock on their personal tax returns in association with imputing their K-1 information.
Turbo tax did not prompt me to do that last year so I will be looking into how to accomplish that this year.
Correct, a Basis statement needs to be provided in many circumstances, such as if you received Distributions or are claiming a loss.
TurboTax does not allow you to do it. You either must MANULLY prepare the statement and MAIL it with your tax return, or use another method (such as a tax professional) to have your tax return done.
Where do I enter it on my turbo tax business or do I just include in my gross revenue since I dis use all of it for payroll?
I usually don't file a balance sheet my business is very small, so what do I do
So the Basis Report must be mailed in, thus the whole 1040 must be mailed in? Or go to a tax professional? That sounds as though there will be no more E-File of personal taxes for S Corp owners, on our own, using TurboTax Premiere or any TurboTax software? Am I missing something?
@PhylI wrote:So the Basis Report must be mailed in, thus the whole 1040 must be mailed in? Or go to a tax professional? That sounds as though there will be no more E-File of personal taxes for S Corp owners, on our own, using TurboTax Premiere or any TurboTax software? Am I missing something?
Correct. You are not missing anything.
I thought that it would Never be taxable income for s corp owners as it is equal to Distributive Shares of Deductions:
(3) in the case of an eligible recipient that is a partnership or S corporation—
(A) any amount excluded from income by reason of paragraph (1) shall be treated as tax exempt income for purposes of sections 705 and 1366 of the Internal Revenue Code of 1986, and
(B) except as provided by the Secretary of the Treasury (or the Secretary’s delegate), any increase in the adjusted basis of a partner’s interest in a partnership under section 705 of the Internal Revenue Code of 1986 with respect to any amount described in subparagraph (A) shall equal the partner’s distributive share of deductions resulting from costs giving rise to forgiveness described in subsection (b).
This language means that a partner’s tax basis shall increase by the distributable share of deductions attributed to forgiveness. This is meaningful because a taxpayer's adjusted basis affects the taxation of distributions, the ability to recognize losses, and the amount of gain/loss recognized on disposition.
In other words, this language helps ensure business owners who receive the benefit now will not end up losing it in the form of capital gains later. This language prevents an end-run in another form of tax.
Is there any chance that TurboTax will write an option into their program asking if we would like to open a Blank Statement page on which we could report the basis and still E-File?
Blank statement, probably not. A Basis report, maybe, but doubtful.
As far as I know, the IRS e-file system is not set up for directly receiving a Basis statement. Assuming that is still the case, the Basis statement would need to be attached by PDF. But TurboTax does not allow PDF attachments.
While I can't say for sure what TurboTax will do in the future, this has been a requirement for a couple of years now and TurboTax has not done anything about it (and has been allowing its customers to e-file incomplete tax returns, with the Basis statement).
@PhylI wrote:
Is there any chance that TurboTax will write an option into their program asking if we would like to open a Blank Statement page on which we could report the basis and still E-File?
You need PDF software with the functionality to attach additional forms, but it can be done, at least in the physical sense. Whether the IRS actually processes the statement is another matter entirely.
An example is attached to this post (this was a test for a 1041 with a 1099 attached in the same PDF as the 8453-FE).