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

[sellwanger]

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. 

[BobKamman]

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]

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.

[IRonMaN]

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.

[sellwanger]

There is guidance that says if you can reasonably assume it will be forgiven then treat it as forgiven in 2020. If it's going to be tax free income, then you might as treat it as forgiven and get it off the balance sheet, right?

[BobKamman]

@sellwanger 

I never reasonably assume the federal government will do anything.  

[sjrcpa]

@sellwanger Got any cites for that?

I have heard people suggest that, but I'm not buying.

[sjrcpa]

@BobKamman I had 2 clients get forgiveness in 2020. Most have not even applied for it yet.

[sellwanger]

https://www.forbes.com/sites/robertwood/2020/12/21/expenses-with-ppp-money-are-tax-deductible-congre...

[Jon-L]

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 

[Jon-L]

CA has not complied.

[sellwanger]

NJ and NY are following the feds, those are the only states that I care about.

[IRonMaN]

"There is a forbes article that you should be able to google easily"

Susan is really smart so I don't think you are going to be able sell that to her as authoritative.  

[BobKamman]

@sellwanger  "There is a forbes article that you should be able to google easily"

Well, I Googled :"forbes ppp loan forgiveness" and got 180,000 hits.  But I doubt there was an article in the magazine (is it even still published?) with a rather colorful eponymous founder.  Its website now has a collection of bloggers, I suspect mostly unpaid, who may have some expertise, but unproven authority, on various subjects.  "Of course I'm sure, I found it on the Internet" is not something you want to be known for saying.   

[sellwanger]

I edited my response and included the link. Let me know what you think.

[sellwanger]

https://www.journalofaccountancy.com/news/2020/dec/ppp-expense-deductibility-forgiveness-raises-basi...

[sellwanger]

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.

[itonewbie]

I think @sellwanger has confused what the IRS previously said in Rev. Rul. 2020-27 about the nondeductibility of eligibility expenses covered by PPP Loan which a taxpayer reasonably expects to be forgiven.

In any case, the guidance has been made obsolete by §276(a) of the COVID-related Tax Relief Act of 2020 and Rev. Rul. 2021-2.  Incidentally, that also has nothing to do with whether a loan, which has yet to be forgiven, should be written off the books.

[itonewbie]

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@BobKamman wrote:

... Its website now has a collection of bloggers, I suspect mostly unpaid, who may have some expertise, but unproven authority, on various subjects.

---

Many of the articles published outside of the tax and accounting circles are short of facts and overly abbreviated for the general public's consumption.  As they say, the Devil is in the details.

I do enjoy Tony Nitt's articles on Forbes though.  Those articles are highly technical and clearly not written for consumers.

[Jon-L]

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 ?

[sellwanger]

So yes, this confirms my research that the forgiven loan is tax free income. 

https://www.cpapracticeadvisor.com/tax-compliance/news/21204849/paycheck-protection-program-expenses....

[itonewbie]

@Jon-L  There is no dispute on that one.  The OP's confusion is about whether PPP loan not yet forgiven should be written off.

[itonewbie]

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@sellwanger wrote:

So yes, this confirms my research that the forgiven loan is tax free income. 

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No one here ever suggested that it is not.  You may like to re-read the thread.  The focus has been on your suggestion that a yet-to-be-forgiven loan should be written off the balance sheet.

There is guidance that says if you can reasonably assume it will be forgiven then treat it as forgiven in 2020. If it's going to be tax free income, then you might as treat it as forgiven and get it off the balance sheet, right?

[sellwanger]

I understand that as, if there is not enough basis to take the deduction (meaning loss), then you can adjust basis so that the deduction can be taken. But if there are no basis issues, and you can fully take the loss, then you don't do anything with basis, and it's an m-1 adjustment. It's not automatically an increase in basis.

[sellwanger]

I'm kindly asking for everyone's guidance, please tell me if I'm right or wrong, or provide your thoughts, I'm totally open for opinion, I just want to make sure I understand all of this, I'm not here to argue.

[itonewbie]

But why would you recognize an income on the book if the loan has not yet been forgiven?  And until that happens, there is no difference to reconcile on M-1 in relation to the loan, especially since eligible expenses would be deductible regardless.

[IRonMaN]

Nobody is here to argue.  If the loan really isn't forgiven in 2020, it is still a loan and should stay on the books.

[sjrcpa]

I agree I don't buy it.

[sjrcpa]

@sellwanger that is no authority.

[sellwanger]

Yes, I agree. Thank you.

[sjrcpa]

Again, not authority.

[sellwanger]

"I don't buy it"? Don't you think you have a professional responsibility to research this to a point that you are convinced it's either true or not true? It's kind of a big issue. I'm not saying these articles are 100% true, but you kind of have to keep reading things to see where your research takes you.

[IRonMaN]

But now you are arguing.  Your research has consisted of articles found on the internet.  Those don't exactly hold a lot of value in the real world of tax.  But what's your rush?  If it isn't taxable this year and it won't be taxable next year, why the hurry to write it off the books?

[sellwanger]

Spoiler

Yes

[itonewbie]

@sellwangerNot sure why you'd feel that way.  We have addressed your specific points and provided citations as well as technical explanations.

Just in case I'm out of touch with internet lingo, I actually checked the dictionary but it doesn't sound like any one of us would fit the definition of a troll: https://www.merriam-webster.com/dictionary/troll

[sellwanger]

My original question wasn't really about the balance sheet, that's more of a gaap issue. Im just trying to figure out if I can tell my clients that their PPP loans will not be taxable, and will not reduce their payroll deduction. I think I have my answer, but it was a struggle with this crowd.

[IRonMaN]

"but it was a struggle with this crowd"

If you feel that way, you really need to try it from this side of the table.

[itonewbie]

@sellwanger  But those specific points were addressed here: https://proconnect.intuit.com/community/proseries-tax-discussions/discussion/re-ppp-loan-taxability-...

[sellwanger]

all I got from that post was that I was confused and that one revenue ruling superceded another revenue ruling. So my specific questions are still is the PPP loan tax free, and how are you going to handle it on the 1120S?

[IRonMaN]

Yes, it is tax free for federal purposes.

[sellwanger]

Thank you. How will you handle it on the 1120S, as an M-1 adjustment?

[BobKamman]

@itonewbie "I do enjoy Tony Nitt's articles on Forbes though"

Well, you know what they say about readers who pick his stuff

[itonewbie]

Biased and partial, I guess. 🤣

[sellwanger]

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. 

[IRonMaN]

Yes and yes.

[itonewbie · Accepted solution]

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@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. 

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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.

[sjrcpa]

Yes it is an M-1 book tax difference.

[sjrcpa]

Yes I have a professional responsibility to research. Forbes is no where on my, nor should it be on any tax professional's, go to source. I'll give a little more weight to JoA since I know articles go through technical review.

I start with the law, then Regulations, then IRB Rulings and Rev Procs, Cases, etc. I'll supplement with RIA/CCH or similar tax research company commentary. 

Like itonewbie I also like Toni Nitti but he has copped to making mistakes when he gets stuff out quickly in this ever changing COVID environment.

You also need to make sure what you're looking at is current.

[Jon-L]

To balance out my S Corp return for a PPP already forgiven in 2020:

Sch M1:

enter amount of PPP on line 1 (it's included in "book" income)

enter on line 5a same amount as above (tax exempt)

M1 balances

Sch M2:

line 3 other additions in the Other AA column

that should get your M1 & M2 all in balanced/sync with you Retained earnings on the balance sheet 

Finally - show it as a contribution (stock) on your basis info worksheet 

and it shows up on the shareholders basis statement giving them basis without appearing on the k-1

That's how I'm doing it !

[sjrcpa]

@Jon-L I don't use ProSeries so maybe there is something unique to it, but it sounds to me like the forgiven PPP loan will be added to basis twice with your method-once as tax exempt income and once as capital contribution.