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S-Corp Instructions 2021 Updates, PPP Forgiveness Reporting


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Just reading up on the 1120S instructions updates. Found this summary which quotes the 1120S instructions.  To Read the Entire Article, Click Here

Quote

 

In the draft instructions for the 2021 Form 1120-S, the IRS has now stated their position—and it agrees that such expenses do not reduce the accumulated adjustments account.  Page 45 of the 2021 draft Form 1120-S instructions provides:

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.[5]

Thus, returns prepared using the default treatments provided by most tax software will have understated AAA and overstated OAA for S corporations who received PPP loans and have treated the loan as forgiven when filing the 2020 S Corporation income tax return.

Revising this calculation should not require formally amending the 2020 S Corporation return, since the amount of AAA at the beginning of 2021 is not required to agree with that shown on the 2020 return by any provision of the IRC. Rather, the IRC simply requires that the S corporation use the proper amount of AAA to determine the tax status of any distributions.

If distributions in 2021 did not exceed AAA this adjustment would be all that is necessary to correct the reporting.

 

The words in red were written under column (d) instructions for the 1120S so I'm not understanding how this corrects the reporting on M-2 column (a) being understated.  Are we suppose to add the PPP forgiveness to line 3 of column (a)?

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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. I would also agree with your schedule M-2, line 3, column (a). Not sure what description I would use.

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On 1/15/2022 at 9:53 AM, WBR said:

I would also agree with your schedule M-2, line 3, column (a). Not sure what description I would use.

Thanks!  It'd be nice if the instructions clearly stated column (a), line 3 for the adjustment.  Do you see another way the understatement is corrected?

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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."

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