PPP Expenses Reported in the OAA

Technical topics regarding tax preparation.
#1
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Per the IRS' 2021 1120-S instructions, "An S corporation should include tax-exempt income from the forgiveness of PPP loans on line 3 and report expenses paid with PPP loans that are forgiven on line 5 in column (d) of the Schedule M-2."

We (and our Lacerte software) reported the 2020 loan forgiveness in the OAA, but not the related expenses. Any ideas on how to fix this for 2021 other than amending any 2020 return with PPP loan forgiveness? Can you simply adjust the beginning balance in each column to conform, or does a CY adjustment need to be made to shift the PY expenses from AAA to OAA?

https://www.irs.gov/pub/irs-dft/i1120s- ... Newsletter
 

#2
sjrcpa  
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I'd just adjust the beginning balances and note in the client workpaper file why.
 

#3
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sjrcpa wrote:I'd just adjust the beginning balances and note in the client workpaper file why.


Agreed...and adjust AAA for the difference as well, of course.
~Captcook
 

#4
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#5
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Thank you!
 

#6
WBR  
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I would agree unless the distributions exceeded the AAA balance on the originally filed return then I would recommend filing an amended 1120S return for 2020, amending the 1099-Div and amending the shareholder’s personal return.
 

#7
golfinz  
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This only matters if an S Corp has AE&P (was once a C Corp) and has dist > AAA. I have one and we issued a 1099-Div because of this issue. Is this substantive enough to amend the 2020 S Corp return and reflect the PPP expenses in OAA (thus increasing AAA and removing the dividend)? If the PPP loan was 450k, do we just record 450k as as another deduction in OAA so that they net to zero?
 

#8
WBR  
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Golfinz – I don’t think it is that straight forward. Wouldn’t you not need to make a M-2 adjustment Line 5 column d for the $450 and an offsetting M-2 adjustment Line 3 Column a for the same amount.
 

#9
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So in most tax software, if you plug this into other exempt income its going to flow through to OAA. Since the IRS says that the expenses should be reported on line 5, I'm assuming there's an adjustment to AAA then for the same amount to show the increase in basis?
 

#10
golfinz  
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Going to hold off on amending until we have more clarity. Likely after tax season.
 

#11
OR_Tax  
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What if the PPP loan forgiveness is not until the subsequent tax year after the expenses were incurred? Should the expenses be shown in the OAA in year 1 and then zeroed out in year 2 when the loan is forgiven? Wouldn't this free up AAA if previously limited in year 1?
 

#12
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Here's a good discussion by Kaplan: https://youtu.be/idE2VtUAtHI?t=1381 The relevant part is from 23:00 to 33:22.

It suggests not to amend the 2020 return unless the change would make a tax difference on the return, and the correction can be made to the 2021 beginning AAA/OAA balances.
 

#13
golfinz  
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While I would agree changing the AAA and OAA balances might work, In my case, we do need to amend because of the 1099-Div.
If this is finalized, we will amend the S Corp, the 1099div and the 1040.
 

#14
OR_Tax  
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Thank you for the link to Kaplan.
 

#15
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Fortunately I do not do anything with C-Corps so this doesn't affect any of my client's other than the AAA. Do you think the same applies to any EIDL grants?
 

#16
OR_Tax  
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My understanding is that EIDL grant portions are considered tax exempt income and appears to be treated in the same manner as PPP loan forgiveness as well as the offset of expenses related to tax exempt income.

(2) Emergency EIDL Grants and Targeted EIDL Advances. Section 278(b)(1) 8
and (2) of the COVID Tax Relief Act provide that any Emergency EIDL Grant or
Targeted EIDL Advance is not included in the gross income of the person that receives
such advance or funding, and no deduction is denied, no tax attribute is reduced, and
no basis increase is denied, by reason of such exclusion from gross income.
Section 278(b)(3) of the COVID Tax Relief Act provides that, in the case of a
partnership or an S corporation that receives such advance or funding, any amount
excluded from gross income under § 278(b)(1) of the COVID Tax Relief Act is treated
as tax exempt income for purposes of §§ 705 and 1366 of the Code.........
 

#17
WBR  
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Final 1120-S Instructions for 2021

"Column (d). Other Adjustments Account
The other adjustments account is adjusted
for tax-exempt income (and related
expenses) and federal taxes attributable
to a C corporation tax year. After these
adjustments are made, the account is
reduced for any distributions made during
the year. See Distributions, later.

Tip

PPP loans. An S corporation
should include tax-exempt income
from the forgiveness of PPP loans in column (d) on line 3 of the
Schedule M-2.

An S corporation should report expenses
paid this year with proceeds from PPP
loans that were forgiven this year in
column (d) on line 5 of the Schedule M-2.

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.

If column (a) on line 1 of the Schedule M-2
includes expenses that were paid in a
prior year with proceeds from PPP loans
that were forgiven this year, 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."
 

#18
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Not to be dense, but any S Corp that has had a PPP loan forgiven the end result will be a zero balance in OAA? In other words, the amount of the PPP loan will equal expenses paid with PPP proceeds?
 

#19
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I have a client (been trying to retire the past few years, have referred many clients to other CPA firms, just want to do individual taxes) that is an S corporation with $700,000 in PPP loans and an RRF grant. About to drive me nuts. Just posting here so this thread will be in my "View Your Posts" list for easy access. As someone so cleverly wrote, I am just about fully depreciated.
 

#20
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I'm still trying to figure out what to do with EIDL Grants as well, do they go back to AAA?
 

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