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PPP Loan Taxability - Is it an M-1 adjustment?

Forum|Forum|5 years ago
January 14, 2021
59 replies
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My research on the PPP loan taxability this afternoon has told me that on 12/27 congress made it clear that the proceeds from the PPP loan would not be income, and that you would not have to reduce your expenses for payroll (and other expenses etc.) that were paid for with the money. Making it tax free. So I'm assuming that means its an M-1 adjustment. What is the consensus on what line to put that M-1 adjustment, permanent "other" income item? If anyone can confirm my research and let me know how they will list the M-1 adjustment I would appreciate it.

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Best answer by itonewbie

So if it is forgiven by 12/31/20 then it becomes tax-free income. No reduction of expenses, correct? And then what will you do on the 1120, an M-1 adjustment for permanent income adjustment? No one seems to be able to answer that question.

@sellwanger wrote:
So if it is forgiven by 12/31/20 then it becomes tax-free income. No reduction of expenses, correct? And then what will you do on the 1120, an M-1 adjustment for permanent income adjustment? No one seems to be able to answer that question.

It's been answered many times in different ways.

Eligible expenses covered by PPP loans are deductible regardless of whether the loans will actually be forgiven, pursuant to §276(a) of the COVID-related Tax Relief Act of 2020 and Rev. Rul. 2021-2.

If the loan is, indeed, forgiven by the fiscal year end, it would then be written off the balance sheet, recognized as income on the books, and reconciled as a book-tax adjustment on M-1. If it is yet to be forgiven, it stays on the books and there'll be no adjustment on M-1.

BobKamman

Level 15

Others in their answers might also address this issue: The loan has to be "forgiven," doesn't it? I told clients not to start that paperwork until this year, because we were waiting for Congressional action. Have others already completed the process of loan forgiveness? Otherwise, wouldn't there just be a loan showing up on the balance sheet?

Accountant-Man

Level 13

Once the loan is forgiven, in order to write it off you would need to report the income. Since it is tax exempt, that is a book entry: Debit PPP Loan Payable, Credit Tax exempt income.

If the loan is not forgiven until 2021, then it is still on the balance sheet as PPP Loan Payable as of 12/31/2020. There is no income yet, so there is no book income nor any M-1 adjustment. That occurs in 2021.

The expenses paid from it should just be expense deducted when paid. 2020 mostly.

** I am "Elevating with Intention!"

C

Cecivv

Level 3

My question is, If it is not forgiven in 2020, what do you do for the CA/ State side when it is non conforming? I have it as a liability on my books, but was told that I need to M-1 out the amount of loan X % expected to be forgiven as part of the 2020 return.

IRonMaN

Level 15

But always remember, just because the feds don't require you to pick up any income on the forgiveness doesn't mean your state was so forgiving.

Slava Ukraini!

Jon-L

Level 4

CA has not complied.

Jon-L

Level 4

I have clients who have been forgiven. I'm moving from a liability right into a capital account for federal. I have read it's allowed to increase basis. I don't even put it on the P&L federal. I'm treating it as if it was a capital contribution of cash.

CA disallows a deduction for the expenses paid, so for simplicity I'm putting it into an income account on the CA return

S

sellwangerAuthor

Level 3

That's not correct, adjustment only in cases where there is inadequate basis to deduct the expenses, I would do more research before you give your clients basis for free money.

Jon-L

Level 4

Quoted directly from the bill:

"no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided by paragraph (1)"

Maybe we aren't on the same page ?

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