PPP and the actual 1120-S preparation

OK. It is time to actually prepare these tax returns. I did scan the discussion board trying to find a discussion and although I imagine there are some, I am putting this out here.

I have my first 1120-S that I am working on. I am putting the non-deductible expenses/income on the M-1 line 5 "income on books this year not included on Schedule K, Lines 1 through 10."

And just as this nice Journal of Accountancy Articles says, the "income" shows up in OAA on the M-2.
https://www.journalofaccountancy.com/ne ... ssues.html

And then I go to my state return and I am just putting in the "PPP" "income" as it is taxed in the state of California in this case on line 7 of the state return "Other additions."

The last paragraph of the nice Journal of Accountancy Article says: "The treatment of PPP loan forgiveness likely increases the S corporation’s other adjustments account (OAA), limiting the amount of distributions to the shareholders that may be a tax-free return of basis in the stock (which is restricted by the amount of the accumulated adjustment account (AAA))."

Does the PPP tax free adjustment going to OAA really muck me up? We are supposed to get basis.
Does the way I am slapping it back on the state return muck me up in a way I am not thinking of.

I know I will have questions on the C Corps. But just starting this now for a discussion of actual preparation so I don't screw this up more than I probably already have.

That doesn’t sound right - basis = basis. Tax exempt income = tax exempt income (which increases shareholder basis).

They might be talking about ordering and previously taxed income, but a cash distribution to a shareholder with sufficient basis would be tax free.

Read the heading for that section in the article you linked, doesn’t apply to s corps with zero AE&P.

Hello, does the PPP create basis?
assume

01/01/20 basis was 0
2020 sales 30k
PPP 10k
Payroll exp 30k
Net income is 0 (30-30)
Shareholder distribution 10k
the distribution is not taxable, correct?

thanks in advance

Hello, does the PPP create basis?
assume

01/01/20 basis was 0
2020 sales 30k
PPP 10k
Payroll exp 30k
Net income is 0 (30-30)
Shareholder distribution 10k
the distribution is not taxable, correct?

thanks in advance

Only if the loan was forgiven before the end of the year. Otherwise, the PPP is still a loan at 12/31/2020.

When I asked my brilliant wife what her thoughts were, she said, "well, where is Lacerte saying to put the forgiveness?" So I called and they say do exactly what I was doing which is the M-1 line 5 and then other adjustments on the state return.

So is that the final answer?

Great. I guess I was prepared to just dump all these EIDL/PPP Grants into tax exempt income and be done with it. The Capt reminds me that that's not technically correct since they're not yet forgiven. But I don't want to have this crap rolling over two years! Then I have to remember next year what happened.....since we do KNOW DE FACTO that they WILL BE FORGIVEN....is it too wiggly to just do as I suggest? Or do I need to carry them as loans? Well, not the EIDL grants, we know that's ok....but the PPP?

JR1,

I don't know about keeping it as a loan. I am going to take it in 2020 based on all of those rulings and AICPA jabberings we have been pouring over for months and call it a day: "Entities that expect to meet the PPP loan eligibility criteria for forgiveness and conclude that the PPP loan represents, in substance, a grant that is expected to be forgiven may elect to account for the PPP loan funds received as a grant.

Based on the IRS' prior justification of why PPP expenses were supposed to be non-deductible in 2020, it seems proper that if we have reasonable expectation that the loan will be forgiven, it would be proper to treat the tax-exempt income on the 2020 tax return. I'd love to see something stronger, though.

YAY! Thanks for that. I will read no further now. LOL.

Based on the IRS' prior justification of why PPP expenses were supposed to be non-deductible in 2020

Yeah, but all that prior stuff is out the window. End result is: Just treat it like a normal loan.

And I think that quote in Post #7 is not coming from any tax source.

We don’t know that, the December legislation did not say that it was a loan for tax purposes (sort of the opposite, it was clearly focused that the income - nature would be tax exempt).

So if borrower was a partnership and hypothetically had a PPP loan balance at year-end, would the partner’s basis be increased for all purposes on this non-recourse loan (including at risk)? If your answer is “no”, then it seems this is contrary to congressional intent of ensuring that basis would be available to taxpayers.

Heck, there isn’t even an arms length borrowing rate for unsecured non recourse debt!

Yeah, but all that prior stuff is out the window. End result is: Just treat it like a normal loan.

Two months ago the IRS was willing to state that PPP loans aren't really loans at the end of the year for tax purposes. Why should we imply otherwise? And maybe they're not really loans at all, given that they're advanced without creditworthiness checks, issued at below-market interest rates, and don't have to be repaid contingent on spending the money in a manner advancing the government's interest.

Putting that aside, for accrual-basis taxpayers, they spent their PPP loans in a manner that (under the CARES act) states they have the right to have income. The amount of income can be determined with reasonable certainty. Sounds to me like accrual-basis income in 2020.

And for cash-basis taxpayers, they received an advance payment of income in 2020. Sounds to me like cash-basis income in 2020.

So if borrower was a partnership and hypothetically had a PPP loan balance at year-end, would the partner’s basis be increased for all purposes on this non-recourse loan (including at risk)? If your answer is “no”, then it seems this is contrary to congressional intent of ensuring that basis would be available to taxpayers.

If it's a partnership then basis would be increased by either the tax-exempt income or it being a loan. If your concern is the non-recourse part causing at-risk issues, and we assume that the PPP loan is a loan... is the PPP loan actually non-recourse? I feel like my clients' paperwork had some pretty interesting language for something you want to classify as a non-recourse loan.

If your answer is “no”, then it seems this is contrary to congressional intent of ensuring that basis would be available to taxpayers.

Nah, it would just be a timing issue.

We don’t know that, the December legislation did not say that it was a loan for tax purposes

I’m pretty sure the new law used the word “indebtedness” (in more than one place). And the original bill, which is still law, made it pretty clear it was a loan. The only reason you had “clarification” via new legislation was because of the IRS’ position, which was highly questionable. And now you guys want to use that highly questionable position to support your position, that we should be able to remove the “loan” from the books prior to formal forgiveness.

Everything now lines up with straight loan treatment.

Why should we imply otherwise?

See above. Answer is because the position you want to take is based on a poor support and is highly questionable, just like it was when the IRS advanced it.

Sounds to me like accrual-basis income in 2020.

Sounds like COD income to me (just like with a normal loan), which one wouldn’t accrue.

You guys are free to handle things how you want on your own clients’ returns, but we won’t be removing any PPP loans from the books until they are formally forgiven.

Yeah, but all that prior stuff is out the window. End result is: Just treat it like a normal loan.

Two months ago the IRS was willing to state that PPP loans aren't really loans at the end of the year for tax purposes. Why should we imply otherwise? And maybe they're not really loans at all, given that they're advanced without creditworthiness checks, issued at below-market interest rates, and don't have to be repaid contingent on spending the money in a manner advancing the government's interest.

Putting that aside, for accrual-basis taxpayers, they spent their PPP loans in a manner that (under the CARES act) states they have the right to have income. The amount of income can be determined with reasonable certainty. Sounds to me like accrual-basis income in 2020.

And for cash-basis taxpayers, they received an advance payment of income in 2020. Sounds to me like cash-basis income in 2020.

So if borrower was a partnership and hypothetically had a PPP loan balance at year-end, would the partner’s basis be increased for all purposes on this non-recourse loan (including at risk)? If your answer is “no”, then it seems this is contrary to congressional intent of ensuring that basis would be available to taxpayers.

If it's a partnership then basis would be increased by either the tax-exempt income or it being a loan. If your concern is the non-recourse part causing at-risk issues, and we assume that the PPP loan is a loan... is the PPP loan actually non-recourse? I feel like my clients' paperwork had some pretty interesting language for something you want to classify as a non-recourse loan.

Just curious... is this the prevailing argument for this position? Guys got anything else?
Jeff, can you come up with any plausibly reasonable argument for treating as income in 2020? We really beat up the deduction disallowance position by the IRS. I don't this subject is getting the same attention.

I don't this subject is getting the same attention.

Because, for all the logical reasons Jeff shared, there's nothing unclear. Based on the information we had at the time, most of us probably advised our clients to hold off applying for forgiveness..."Who knows what changes Congress will put forward?"
Now, those clients of mine who went ahead and applied for/received forgiveness have more basis in 2020.
We were also advising not taking distributions in 2020. If clients ignored that, this is probably the year I'm more comfortable recording a shareholder receivable for an excess distribution because the basis increase simply falls in the next year and isn't the beginning of a trend.

I think some folks are trying to create ambiguity where none exists so they can fall back on an interpretation they want, but isn't supported by (now) existing statute.

You guys are free to handle things how you want on your own clients’ returns, but we won’t be removing any PPP loans from the books until they are formally forgiven.

I haven't prepared any tax returns yet with PPP forgiveness and I'm almost certainly extending all of mine. I am hoping to see guidance, even if subregulatory in nature, from the IRS before I file any.

Just curious... is this the prevailing argument for this position? Guys got anything else?
Jeff, can you come up with any plausibly reasonable argument for treating as income in 2020? We really beat up the deduction disallowance position by the IRS. I don't this subject is getting the same attention.

We've had this as law for under 3 weeks. I'm sure that smarter people than I have smarter ideas. Honestly, given his posting history, I'm surprised that Jeff-Ohio is as stern and unbending in a position that could negatively affect his clients.

I was one (seemingly of the few) who believed that the IRS was reasonable in their original interpretations of the CARES act on the nondeductibility and the year of nondeductibility, so I'm really surprised to see this level of fatalism as well.

The original interpretations by IRS are now MOOT. They were based on the law as it was first passed, which lacked clarity on deductions and forgiveness. We NOW have that clarity. So it's much like a proposed reg that's withdrawn. We know the loans will be forgiven as soon as they hand in the one page sign here press hard....

I am handling the same as the Capt & Jeff until I have further guidance. To me, until it is forgiven, it is a loan. The loan is not automatically forgiven. They have to submit a forgiveness application and it then has to be approved. At that point, I will consider it non-taxable income.

We know the loans will be forgiven as soon as they hand in the one page sign here press hard....

Only loans under $150K will qualify for this forgiveness form.
Loans above $2 million, or $2 million and above, are going to be audited and have to complete the Loan Necessity Questionnaire.
Some clients are going to decide not to apply for forgiveness.