Business & farm

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.