PPP Loan Forgiveness Affect on M-1

[SP-Jenn]

My M-1 for my 1120-S is out of balance by my forgiven PPP loan amount. Is this acceptable?

[JillS56]

No.   There needs to be an adjustment shown on your M-1 recognizing the PPP loan forgiveness.   

If the PPP Loan has been forgiven.  The adjustment will be shown on your M-1 as a book-tax adjustment. This adjustment would go on Line 5 of the M-1.

If the PPP loan has not yet been forgiven, you would not enter this adjustment, but add a liability item for the amount of the PPP loan.    It would go on Page 4, Schedule L under Liabilities, Line 17.

[SP-Jenn]

Thanks for your reply.  However, that adjustment was already entered by Turbo Tax as a result of the question about whether we had a PPP loan forgiven.  After the TTAX program entry, my M-1 is out of balance.

[JillS56]

The problem may be the result of the way the question about PPP loan was answered. 

If the PPP loan is forgiven, you do not report the loan as income.  Here are a few questions that might help give some resolutions based on possible answers.

1. How did you report receiving the Loan in your Books?   It should have been deposited but a liability account should have been set up for showing the PPP loan.   It should have been reported as other income or non-taxable income.
2. Did you receive forgiveness of the PPP loan before December 31, 2021?    If so, the liability should have shown on your Balance Sheet.
3. If the PPP loan was forgiven before December 31, 2021, then the PPP loan should not be reported as either income or a liability on your tax return.    
4. The PPP loan should be reported on line 16(a) of Schedule K as Other Tax-Exempt Income.

To fix the problem go back to where TurboTax was asking you the questions about PPP loan and answer the question NO.  Answering No to the PPP loan questions should fix your problem.

If this does not fix the problem, have your tried to call TurboTax Live.   There are experts answer the phones that may be able to help you fix this problem.

[SP-Jenn]

Thanks so much for your input.  I will look into this.  Originally, I had received PPP Loan 1 in 2020 and Loan 2 in 2021.  Both were forgiven in 2021.  I had recorded both as Paid-In Capital, so my Equity went up.  Based on your input, it seems that I should have recorded it as Income??

[SP-Jenn]

Correction:  Originally, I had recorded the loans as Loans Payable.  Once forgiven, I debited loans payable and credited Paid-In Capital.

[ThomasM125]

@SP-Jenn The entry you made to Paid-in Capital should have been to Other Income. 

On your S corporation return, you would report it on schedule K on line 16(a) as Other Tax-Exempt Income.

[dnorwick]

Confused by this answer.  I recorded the 2020 PPP loan as debit to cash and credit to liability, reflected on balance sheet ending 2020.  Forgiveness of loan granted in 2021, entry to record was a debit to the liability account to remove contingent liability with a corresponding credit to Add'l paid in capital.  

Now turbo tax is asking if there was a 2021 loan forgiveness, which indeed there was.  When I answer "yes" to that question, a book difference is reported in M-1.  Now you're suggesting answering "no" to that question, which is not true, which would correct the error, however, would that be a red flag that could trigger adverse consequences?

Thank you

[ThomasM125]

When you recorded the forgiveness of the loan, you should have posted the offset to Other Income, not paid in capital. It is book income, but reported as tax-exempt income on your tax return, on line 16(a) or 18(b) of schedule K, depending on which return you are preparing (form 1065 or 1120-S.)

If you report it that way, you may not have the issue with your M-1 schedule.

[hsimmen]

Did you figure out how to get your return to work with the PPP being in the M-1? I am out a balance by that exact amount and can not figure out what to do besides just removing anything to do with PPP?

[AliciaP1]

Your return being out of balance is a known issue and we are working to resolve this.  There is a workaround for this so you do not have to delay filing your return.

Please follow these steps:

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. Scroll down to Other permanent expense items, list the description "PPP funded expenses" and enter the amount of covered expenses for your PPP loan.
6. On the left, click PPP Loan Stmt
7. Scroll to the bottom of the page and respond to the questions on the Smart worksheet

@hsimmen

@dnorwick

@SP-Jenn

[DD-DB111]

I tried the above work-around.  First the only way my Balance Sheet and Retained earnings balances is if I have my PPP of $23000, entered in as Other Income.  This was forgiven in full in 2021.  I did the work around, exactly as specified.  On 1120S line 5 is the Other income that I entered which results in the Ordinary business income on line 21, agreeing with my books.  On the 1120S Page 2, line 16b has $23000, 16c also has $23000 which resulted from the work around.  The balance sheet agrees. The M-1 shows line 1 income from 1120s , the PPP funded expenses shows up in 3b after Travel & Entertainment.  The total on line 4, = total of them both, (which is really adding the $23000 in twice, once in my Other Income and the work around)  line 5 PPP loan forgiveness = $23000, as well as the total on line 7.  Line 8 is back to my Net income loss per books.    M-2 column a shows PPP funded expenses as a neg $23,000, resulting in a loss on line 8 for balance at end of tax yr. In column d other adjustments line 3 shows 23,000, There is no negative in row 5 in column d, it is in column a..  The resulting total in column d, is totally foreign to anything on my books. On to the K1 - 1 Ordinary business income is my book income (only because I entered the $23000 in Other Income to make everything balance. 16 B is $23000, 16 C is $23000 and D16 D is my Distribution.  Is any of this correct, or do I need to take the $23000 out of other income, and then nothing else agrees to my books?  Thanks.

[AliciaP1]

The PPP loan is not reported on your return as income except as the Other Permanent Income Item as listed in my previous post.

Per the IRS Instructions for Form 1120S, Schedule K & K-1 for Line 10 Code H Other Income (Loss):

• Amounts related to the forgiveness of PPP loans are disregarded for purposes of this line.

When you complete the information on the Schedule M-1 worksheet, Schedule K and K-1 are appropriately populated for the tax-exempt income.

@DD-DB111 

[DD-DB111]

Then if I remove the $23,000 from other Income, the Balance Sheet and Retained Earnings do not Balance, in addition, the Review brings up the Balance sheet errors and when going to Forms, it says the 1120 is not done. How would I handle all of those things?

[ThomasM125]

@DD-DB111

You should report the PPP income on line 16(a) as Other Tax-Exempt Income if you are filing a form 1120-S. So, I think you had it reported correctly based on your first post.