El1 wrote:If I don't record the receivable and go the M-1/M-2 route, then SH basis is a wash in 2021? And increased in 2022 when cash is received?
Incorrect.
1. No matter which option you pick, you won't have anything funny on the M-2 adjustment. AAA follows the data that's on the K-1, not on the books.
2. Likewise for the shareholder basis: Basis at the end of 2021 will be higher than what you had originally, regardless of whether you make a journal entry in the books. Because it follows the income that's on the K-1, not on the books. So no, you won't have an extra increase in shareholder basis in 2022 when the ERC cash is received.
El1 wrote:"You don't have a nondeductible expense (from a tax perspective)" Is this correct? The wage/payroll tax reduction is a nondeductible expense for tax which is run through M-2 AAA.
It's not a nondeductible expense, it's just a timing difference. Because if you don't make the journal entry in 2021 to recognize a receivable, you're going to credit something in 2022. Just like when you have more depreciation expense on the books than what's deductible on the tax return, you don't show a nondeductible expense on Sch. K line 16c.
El1 wrote:I'm not sure how to report cash received in 2022 if I stick with this reporting.
You'll debit cash and credit something. I haven't looked into what GAAP says, I just stick with the tax method, which says you credit wages expense in 2021. But you're not using GAAP anyway, so you can credit whatever you like, so long as it's not misleading. So you could credit wages expense in 2022, or you could credit ERC income in 2022, or whatever.[/quote]
This article cites IRS Practice Unit on Adjustments to Stock Basis for S Corporations
https://www.tomtalkstaxes.com/p/tom-tal ... rch-4-2022"The nondeductible wage expense has two other effects on the tax return:
It decreases the accumulated adjustments account (AAA) per Treas. Reg. §1.1368-2(a)(3)(C), and
It passes through to the S corporation shareholders as a nondeductible expense, thus reducing shareholder basis in the S corporation stock.
With respect to the shareholder basis adjustment, the IRS Practice Unit on Adjustments to Stock Basis for S Corporations discusses this on page 9:
The Effect of Credits on Stock Basis
Generally, a shareholder may claim credits passed through from an S corporation regardless of
the shareholder’s stock or debt basis. However, there are two situations in which claiming the
credit decreases basis:
1. Credits which require a reduction of an expense, and
2. Credits which require a reduction in the basis of an asset.
An example of the first category is the Research Credit, which requires the taxpayers who
elect the Research Credit to reduce the research and experimental expenditures by the
amount of the credit. That requirement creates a non-deductible expense at the S corporation
level that passes through to the shareholders and the non-deductible expense reduces the
shareholder’s basis."
According to this, AAA and SH basis are reduced for the ERC.
In my example the reduction to AAA and SH basis happens in 2021. They are both a wash as ordinary income is increased by the wage reduction and AAA & SH basis are also reduced by the nondeductible expense. From my understanding, the wage reduction is a permanent book tax difference. I don't think a reduced expense equates to a credit later received as temporary difference. It's true that it's a timing difference in cash flows, but a deduction and a credit don't create a temporary difference?
Let's assume this is correct for argument's sake. I'm then still unclear on the 2022 reporting.
There's needs to be a "reversing" M-1 adjustment in 2022. Would it be nontaxable income and therefore run through OAA on the M-2 and increase SH basis? Or just a book tax difference that doesn't hit the M-2 at all, but increases SH basis...not sure this makes sense.