PPP Loan Forgiveness Balance Sheet Issue S Corp

[KurteL10]

My balance sheet, without including my PPP loan forgiveness amount is in balance. However, the loan forgiven amount is reported in line 24 of 1120S (retained earnings) and thus causing my sheet to be out of balance. I assume that there is a place where I am supposed to put the loan amount in the assets section. In addition, I can't find in turbo tax business, where I should be reporting business loan repayments (I didn't have all my PPP loan forgiven). Thank you. 

[ThomasM125]

You should have reported your PPP loan forgiven amount on line 16(b) of schedule K as Other Tax-Exempt Income.  That will make it show on line 3 of schedule M-2 which will impact your retained earnings on your balance sheet. That may resolve your issue.

You should set up a liability account for your PPP loan and the payments against it would be applied to that account. The interest portion of each payment would go to interest expense though.

@KurteL10 

[Edited 3/24/22 at 6:03 PM PST]

[KurteL10]

Thank you for the response. I think you have have made an error saying m-3 as that is a form for 10+ million dollar businesses. I assume you mean m-2? I used the step by step function to input my loan forgiveness. Turbotax imported the forgiven amount under 16b for me. I see it there, which seems correct. My end of the year balance sheet is the negative forgiven amount. Is the PPP loan supposed to be a negative value under one of the labilities (line 16-27)? That is the only way it would balance to 0. Thanks again. 

[ThomasM125]

Yes, I did mean schedule M-2, thanks for the correction. The PPP loan balance should be a positive amount on the balance sheet. It is possible that you reported the PPP loan receipt as income on your books, that would increase your Retained Earnings by the same amount and that would require you to enter it as a negative amount to balance it out. Your 2021 retained earnings on schedule L should be the beginning retained earnings from 2020 plus your book income, less any distributions to shareholders.

[KurteL10]

No problem. I am still confused. My balance sheet is perfectly balanced if I don't include the ppp forgiveness. When I use the "step by step" tool for imputing the PPP forgiveness, it goes into the retained earnings on line 24 of schedule L. There is no counter to this value in lines 1-15 and thus out of balance. I have posted a picture with different numbers and ID removed to show. Thanks.  

[PatriciaV · Accepted solution]

You can edit your Permanent Adjustments account to reflect the expenses that were paid by the PPP Loan. This should offset the forgiveness income and bring your balance sheet into balance.

Here are the steps used by others make this adjustment: 

1. In Step-by-step mode, under Business Info click the About Your Business tab
2. Click Continue until you get to the Forgiven PPP Loan page and answer No.
3. Switch to forms mode, click on Sch M-1 Wks.
4. Under Other permanent income items add the description "PPP loan forgiveness" and the dollar amount in the Per Books column.
5.  Add a new line to the Sch M-2 Wks additions for "Expenses from forgiven PPP" and use override if necessary to enter the amount in the AAA column instead of OAA
6. Add the same amount of expenses on the M-1 worksheet on the Other expenses related to tax-exempt income in the Per Books column.
7. Review Form 1120S p3-5 to confirm Schedule M-1 is now in balance.

This way the expenses are appropriately reported as deductible and as a reduction of OAA rather than AAA. Per the M-2 instructions in the 2021 IRS 1120-S instructions, "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. " This same guidance applies to prior year expenses included in M-2, column (a), line 1. 

[KurteL10]

This worked, thanks!