Yes, you are correct that the PPP loan forgiveness is to be reported on the M-2 line 3 column d. Here are the steps for reporting the PPP loan forgiveness on M-2 of your 1120-S:
- Report on Line 3, Col (d) the amount of the PPP loan forgiveness
- Report on Line 5, Col (d) the amount of expenses paid with the PPP proceeds forgiven,
The amount of expenses and the amount of the PPP loan forgiven should offset each other.
You are also correct that the PPP loan forgiveness is supposed to increase your basis not decrease. PPP Loan Forgiveness should not be reported on the Shareholder's Basis Worksheet page 1, line 7. Line 7 is asking for a non-deductible expense. The PPP loan is not an expense. The amount of the PPP loan forgiveness should be reported on Schedule K-1 Line 16 Code B.
Here is an article PPP Loan Forgiveness
