Timing differences

[Countingcat]

Turbo Tax calculated a timing difference on my return last year and it is carrying over on this year's return. I have not idea what it is for.  We use cash accounting. What are possible reasons for a timing difference? Should the amount show up on multiple years? I know that's kind of vague but any help is appreciated.

[Mike9241]

do you use quickbooks or other financial software for your business activities? 

then its possible you're using the accrual method to see how you are actually doing financially but legally switch to cash basis when doing your tax returns. 

[Countingcat]

Thank you for the reply. We are using Quickbooks and set it up for cash accounting. The item, I discovered is the amount of forgiveness from the PPP we received. Should that amount remain on the return beyond the year in which it was received or should I remove it?

[Rick19744]

A couple of questions:

• How is the PPP reflected on QB?
  • Essentially, what was the journal entry when you received the funds
• When did the forgiveness occur?
  • Based on the limited facts, I'm assuming 2022?
• What did you do in QB once the "loan" was forgiven?
• What type of entity structure are we dealing with?

[Countingcat]

We received the funds May 2020 and it was forgiven October 2020. It was recorded as other income in QB.  I show a debit to a PPP Loan acct and a credit to a Non-taxable PPP loan forgiveness acct. On my 2020 1120s return it is on M-1 under Other timing income items.

[Rick19744]

This is technically what should have occurred:

• I believe you have some years referenced incorrectly?
  • Forgiven in October 2022?
• But back to basics
• In the year of receipt your should have a DR to cash and a CR for PPP Loan
• Then as the funds were used DR Expense (wages most likely) and a CR to cash
• Then when the loan was forgiven DR to PPP Loan and a CR to Income
• The last entry would have eliminated the loan from the balance sheet and would have recorded income on QB.
• Then when you prepared the tax return in TT, you appropriately had an M-1 for income on the books (QB) and not on the return.
• Going forward everything should be good.
  • Possibly when 2022 was prepared the M-1 was reflected as a timing difference instead of a permanent difference?  As a result, TT is "thinking" there should be a reversal.
  • However, there will be no reversal since this is a permanent difference.

[Countingcat]

It actually was 2020. It has been showing up in 2021 and 2022 as an accumulated tax/book timing difference on the M2. Ironically my retained earnings weren't off until this year so I didn't notice it. Now I'm unsure as to how to correct it. 

[Rick19744 · Accepted solution]

I'm a little confused on your reply:

• The M-2 tracks actual S corp pass through items on an annual and then cumulative basis
• Where exactly is this amount showing up?
• In the year of forgiveness, this amount should have been reflected on the M-2 column (a) line 3
  • This then arrives at a net figure on line 8 balance at the end of the year
  • Then the following year line 8 amount should be reflected in column (a) line 1
  • At this point, the figure is gone as it is just a part of the cumulative AAA

[Countingcat]

I appreciate the follow up. Since I needed to amend the 2020 forms for the ERTC, I went ahead and corrected the entry for the PPP forgiveness on the M1 moving it from temporary timing to permanent. Then going forward it is correct. 

Would love your expertise on the ERTC entries. I'm going to post a question separate for that. Information is scattered everywhere on that.

[Rick19744]

Welcome.

A separate thread is best.