PPP and the actual 1120-S preparation

If an S Chapter has always been an S Chapter, can we simply add OAA balance (from PPP) to AAA?

If an S Chapter has always been an S Chapter, can we simply add OAA balance (from PPP) to AAA?

No...it's NOT AAA.

That is my understanding, unless you elect to by-pass AAA and distribute from AE&P first. The ordering rules, without an election, are:
-nontaxable distribution of AAA (to extent of basis)
-a dividend (to extent of AE&P)
-a nontaxable reduction of any remaining basis and
-capital gain from the deemed disposition of stock.

So, any S-Corp that has AE&P will not be able to use the PPP created basis until all of the AE&P is used up. Correct?

"use basis" is an inexact term.
As basis for distributions...correct. Distributions will need to come out of AE&P before OAA
As basis for losses...no, the addition to basis that the addition to OAA provides definitely allows for additional losses to be claimed by an s-corp shareholder.

There is a more recent post where a C corp is involved and it matters what year the forgiveness becomes income and thus e and p.

Look, this is a balance sheet item only unless you have a distribution problem. So I'm booking it as tax exempt income and watching it hit OAA and calling it a day.

Case law...from Forbes article. Book as tax exempt income in 2020 regardless of year forgiven. It's not a loan.

There is one other possibility. In the tax law, just because you call something a “loan” doesn’t mean it’s necessarily so. It can be difficult to differentiate between a loan and income; to wit, over the past century, the courts have established a number of factors that attempt to discern between the two. Most recently, there was a case in 2020 —Novoselsky v. Commissioner, T.C. Memo. 2020-14 — in which a lawyer received “advances” from clients he was defending that he used to pay the expenses of the litigation. He was only obligated to repay the amounts if he won the case, so he called the amounts a loan and didn’t record any income. The IRS had other ideas, arguing that because Novoselsky would only have to repay the amounts if he was successful in court, they represented income instead of loans. The Tax Court sided with the IRS, eschewing the need for a formal factor test and opting for a simpler approach by concluding that for an amount to be a loan, there must be an “unconditional obligation to repay” that is not “contingent on future events.”

Case law...from Forbes article. Book as tax exempt income in 2020 regardless of year forgiven. It's not a loan.

IMO, your attorney example is factually inconsistent with a PPP loan.

Care to share the article or underlying case on which you make the statement above? I disagree with this treatment.

All of this is making my head spin and the only thing I know for sure is that I should have retired last year rather than planning to call it quits the end of this coming August. Here are some random thoughts and at the end of this post a related question.

My S-Corp client who has no opening year basis used their PPP money to pay expenses which has created a S-Corp loss. The PPP loan did/will not receive formal forgiveness until 2021. So if I can't use the "expected forgiveness" argument in 2020 I guess that I do not get the increase in basis matching up in the same year as the expenses that create the loss? Is a strange way perhaps this does prove their is some justice in the world as I have a real hard time understanding the logic behind how expenses that are paid with funds that do not have to be paid back are then allowed to be added to basis and allow a tax deduction for the expenses paid.

As a side note if California does not move forward with AB-281 we may be stuck with the pre CAA rules on state which will result in the deductions not being allowed on the California return for 2020 which will present some pretty significant differences between the federal and state reporting.

Now for the real question. Have you all noticed the S-Corp question 12 of Schedule B at the top of page 3 of the 1120-S? It reads "During the tax year , did the corporation have any non-shareholder debt that was canceled, was forgiven, or had the terms modified so as to reduce the principal amount of the debt?" If the answer is yes it then asks to provide the amount of the principal reduction. How is everyone planning on dealing with this question, and in what year? The year of expected forgiveness or actual forgiveness? This question scares the tar out of me as I think we all know what the IRS is looking for here. (Debt relief equals possible COD income) I know our PPP forgiveness does not result in COD income and as such I just hate to be dealing with this question 12. If I do report the PPP forgiveness here I will attach some sort of statement of fact hoping someone at the IRS reads it before sending out the audit letter. But then again if the audit letters come after 8/31/21 I guess my clients will just have to contact all of you to help them sort it out as I will be retired and playing golf somewhere.

Oh, thanks Brian. NOT! Hasn't that question always been there? (checking....) Yes, it has. So this isn't about some new PPP/EIDL check-up thing.

Now, what to do with it? My PPP's have not indeed been forgiven yet, but I'm treating them as if they have been....so the technical answer today is NO. And maybe a yes next year....

Sorry for the stress JR1. Never said that the question had not been there in the past. I looked as well and found that it had been there for quite some time. Also checked the instructions and found that for both 2019 and 2020 they skip by any guidance on question 12.

The point I was attempting to make, which obviously did not register, is what is the consensus of the community is handling this question as it relate to PPP forgiveness and in what year?

So it appears that your approach will be to show the non-taxable event in 2020, increase your basis, and then perhaps complete question 12 in the following year? A valid approach and hope you have a nice day!

Yeah, that's where I've landed. I did go back and change a couple returns where distributions "may have" included PPP money, so I go ahead and show it as tax exempt but have reduced S/H distributions and created a note....until 2021 when I can clear it. And I'm answering all the checkboxes no since it's not been forgiven.

I will answer it as it relates to the year they receive actual forgiveness. Which will be the year I show it as non-taxable income and increase basis. If loan is forgiven in 2021, I answer yes on the 2021 tax return, show tax-exempt income, and increase basis all in the same year.

I will answer it as it relates to the year they receive actual forgiveness. Which will be the year I show it as non-taxable income and increase basis. If loan is forgiven in 2021, I answer yes on the 2021 tax return, show tax-exempt income, and increase basis all in the same year.

Not that this is a popularity contest, but I'm doing this as well.

Not that this is a popularity contest, but I'm doing this as well.

Agreed.

OK. So I see that Lacerte Tax software has in screen 13 99 a place to put the PPP forgiveness. It flows to the M-1 just fine. And as of today's update, it adds the income to California in my case. But my CA balance sheet is now out of balance. Hmmm. Work in process? I don't want to call unnecessarily so putting it here if someone has already called.

Let's say forgiven loan is $50,000. I am sending this n/t income to OAA.

Is the $50,000 that was paid for with the PPP a "related expense", also sent to OAA? Form instructions are not clear, and I have not seen any guidance.

Let's say forgiven loan is $50,000. I am sending this n/t income to OAA.

Is the $50,000 that was paid for with the PPP a "related expense", also sent to OAA? Form instructions are not clear, and I have not seen any guidance.

I would argue, no. Although, I've not seen that question posed/answered yet. There is probably a logical argument for it to be 'yes'.

No, they're just usual, fully deductible expense. When you're done, you have the PPP/EIDL money in OAA....forever?

JR1, not my clients! That money went out in distributions as fast as it came in!