S Corp, PPP loan, RRF grant

Sole shareholder S Corp. Has received over $700,000 in PPP loans and an RRF grant. We know the first PPP loan is forgiven, and not taxable. It appears the RRF grant is tax-free, but still awaiting guidance.

The business is a bar/burger place. Because they doubled their capacity due to expansion into the street, it is going to have a killer year in 2021, huge profit even without the tax-free funds.

Like another member here has quoted at the bottom of his posts, I am suffering from depreciation. I can't seem to get my head around how any of the tax-free funds are going to pass through on the K-l, and how the corporation will distribute these funds to the shareholder tax-free.

Any ideas or suggestions appreciated to get me started in the right direction. Will be looking for seminars.

Line 5 on Schedule M-1 and 16b on the K-1.

Then, once those grants/loans are brought into income (non-taxable), the client would get basis. Any distributions taken, for which he has basis, would be tax free to the shareholder.

Taxpayer of above S corp has $65000 in her AE&P account. When I put in the PPP forgiven loans and the tax-free RRF grant, and distribute the entire basis, the Lacerte software reduces the AAA basis first, then the AE&P account second, and then the tax-free amount third.

Corp converted to an S several years ago, leaving the $64,000 in AE&P account. Seems the dividend on this account was not required to be made - unless distributions exceeded the AAA account. Does this sound right? Now the dividend must be made before the distribution applies to the tax-free amounts. Makes sense.

Anyone familiar with what I am talking about, and does this sound correct?

Yes

Probably not a bad time to clear out the AE&P anyway as lots of talk that qualified dividends are going back to ordinary income rates. Maybe if you have not yet finished the 2020 year end, you could elect to distribute E&P via a note, especially if 2020 was a down year.

What is the latest on PPP in California, are they still not allowing expenses? That could hurt

I believe CA is allowing expenses.

*****

Does the following sound correct? In 2021, the S Corp was forgiven $360,000 of PPP loans. And it got a tax free Restaurant Revitalization Fund grant of $380,000. That is a lot of money. Without these funds, the corporation is still going to net $350,000, after $200,000 officer salary, without using any of those "tax-free" funds.

So, though all the "tax-free" funds were used to pay required business expenses and qualified for forgiveness, or qualified for the grant, the business will earn plenty of money to also pay those expenses. As I said, to the tune of $350,000.

Am I missing something? It appears the corporation can distribute all of these funds to the shareholder, and only $350,000 of it will be taxable. Yes there is a little AE&P to deal with, and some other debits and credits here and there. So, really, just because of the pandemic, the shareholder is going to be able to put the entire $360,000 in PPP loans and the $380,000 from the RRF grant in her pocket?

I have got to be missing something. And now with the new PPP loan forgiveness rules, the corporation may be able to get some ERC funds.

And comments appreciated. I am trying hard to stay in balance.

I have not been following the California law changes that closely but I thought their latest law said you could only deduct expenses if you had a 25% decrease in revenue. Has that changed? We do have one California S Corp and their revenue did not decline at all.

There is no doubt that a lot of companies made out very well with PPP. I am not sure how involved you were in recommending that this client apply for PPP and RRF funds but if you were, the client will be thanking you for a long time. No need for you or the client to feel guilty about their good fortune.

The largest CPA firm in New England took an $8.5 million PPP loan. On top of that their Consulting LLC took another $1.9 million. Both have been forgiven already. Did they really need it? No but I can not fault them for taking it.

I would not want to be the CPA who was discouraging clients not to take it, or worse, was not aware of it. We have clients (these are mostly the self employed) who are telling us about friends who were not aware they could have gotten PPP because their preparer did not tell them about it.

Is it the preparer's obligation to notify their clients about the PPP loans? I believe my engagement letter says I will prepare their income taxes, and that is it. Hmm. I notified all of my clients about the PPP loans, but those preparers who didn't notify their clients, can those clients sue the accountant for not notifying them?

No you certainly could not sue your CPA for that but I still think if there was a lot of money at stake, there would be some hard feelings. I do think there was enough in the news for bigger companies with employees that they would be aware of it. But for the client that brings in $101,000 and has $75,000 in expenses and nets $26k, i think a lot of them fell through the cracks. Especially for clients that had their taxes done early and then they changed the rules to make it gross receipts