PPP Loan Forgiveness Impact on Stock Basis and Loss

[taxinfoseeker1]

I am a partner in an S-Corp that received a PPP loan that was later forgiven.  I'm transferring the information received (from our company accountant) on my personal K-1 and the relates 1120 into my TurboTax return.  The company had a loss in 2021 and I see my portions of the loss and the PPP forgiveness (tax exempt) income reported on those forms.  When I transfer the info into TT I see an unexpected decrease in my tax liability, seemingly due to how TT is treating that loss as allowable w/ relation to my stock basis.  Specifically:

• My share of the company loss, reported on the K-1 was about -$146K
• My share of the forgiven PPP loans was $152K, reported on the K-1 as 'tax exempt income' (box 16, code B)
• When I punched the $146K loss number, along with the others reported on the K-1, into TurboTax, my tax due went from about $2K to a tax refund of about $34K--as if that $146K loss was directly applied to my net income.
• From what I understand (?) an allowable loss can't exceed by stock basis, which (as reported on Form 7203) was only about $8K
• As filled out on Form 7203, my allowable loss amount is still reported as $146K
• This seems to be because, since the instructions for ‘tax exempt income” on Form 7203 say for “Line 3k. Enter the sum of the amounts from Schedule K-1 (Form 1120-S), box 16, codes A and B.” , this includes $152,286 of income for PPP loan forgiveness (code B on the K-1)
• So, it seems that this $152K PPP loan forgiveness amount is added to my stock basis, which then exceeds the loss, allowing me to apply the full $146K loss amount to my income, greatly decreasing it--which then results in overpaid taxes and refund due.

Does that sound right?  This seems to be what's happening, but also too good to be true--it seems very unlikely that Uncle Sam would forgive that PPP loan and then also allow one to use it to further reduce the tax liability.  What am I missing or doing incorrectly?

Thank you so much in advance for any advice or insights!

[Mike9241]

Line 16b. Other Tax-Exempt Income Enter on line 16b all income of the corporation exempt from tax other than tax-exempt interest, for example, life insurance proceeds - not taxable but is treated as income for purposes of determining basis, but see section 101(j) for limits and reporting
requirements). Generally, under section 1367(a)(1)(A), the basis of the shareholder's stock is increased by the
amount shown on this line. this line would show PPP loan forgiveness.

reporting by the S-Corp must comply Rev-Proc 2021-48

https://www.irs.gov/pub/irs-drop/rp-21-48.pdf 

in effect, you get the double benefit. the forgiveness isn't taxable and it increases your basis to be able to deduct  losses and expenses

[taxinfoseeker1]

Thank you, @Mike9241 !  Wow, that's incredible.  In my experience, more often than not, you get 'dinged' twice, not get the benefit twice... 😕

In reading the linked to PDF (and going a bit cross-eyed), I see the following statement under '.02 Forgiveness of PPP Loans', item (1) (highlight mine):

"Specifically, § 7A(i) of the Small Business Act and §§ 276(b) and 278(a) of the COVID Tax Relief Act provide that, for purposes of the Code, no amount is included in the gross income of an eligible recipient or an eligible entity, as appropriate, by reason of the forgiveness of a PPP Loan, and no deduction is denied, no tax attribute is reduced, and no basis increase is denied, by reason of such exclusion from gross income. "

Is that the item (or one of the items) from which it's safe to draw the conclusion that, in fact, the stock basis can be increased by the PPP loan, thus allowing for the loss to be allowable to a higher extent?

Thank  you so much again!

[Mike9241]

• Specifically, § 7A(i) of the Small Business Act provides, in relevant part, that “no amount shall be included in the gross income of the eligible recipient  by reason of forgiveness of indebtedness

this is exactly what I said the income is not taxable

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• [on an original PPP covered loan],” and “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of [that] exclusion from gross income.”

again this is what I said you get the deduction for the expenses because basis goes up. 

end of story or if you still have questions contact a tax pro.

[Mike9241]

you have both the IRC sec 1367 and the various acts that confirm 1367(a) (1) (A) treatment under IRC 1366(a)(1)

(a)Determination of shareholder’s tax liability
(1)In general
In determining the tax under this chapter of a shareholder for the shareholder’s taxable year in which the taxable year of the S corporation ends (or for the final taxable year of a shareholder who dies, or of a trust or estate which terminates, before the end of the corporation’s taxable year), there shall be taken into account the shareholder’s pro rata share of the corporation’s—
(A)items of income (including tax-exempt income), loss, deduction, or credit the separate treatment of which could affect the liability for tax of any shareholder, and