In November 2021 the IRS issued three Revenue Procedures (RP 2021-48, RP 2021-49, and RP 2021-50) providing guidance for reporting excludable income resulting from the forgiveness of Paycheck Protection Program (PPP) loans.
Rev. Proc. 2021-48
Rev. Proc. 2021-48 section 3.01 addresses the timing of reporting the income excluded from gross receipts due to the PPP Loan. Income may be either received or accrued based on:
(1) When the expenses eligible for forgiveness were paid or incurred;
(2) When an application for PPP loan forgiveness was filed; or,
(3) When PPP loan forgiveness was granted.
Rev. Proc. 2021-49
Rev. Proc. 2021-49 addresses reporting of income and expense according to Section 1366(a)(1) and adjustments to basis of stock according to Section 1367(a)(1). It includes guidance to corporations for similar adjustments of stock basis of shareholders under Sec 1502 and Regs. Sec. 1.1502-32 and the cancellation of debt under Section 1.1502-32(b)(3)(ii)(C)(1) .
Rev. Proc. 2021-50
Rev. Proc. 2021-50 provides information relevant to partnerships.
Statement to include in the return
An S corporation that has tax-exempt income resulting from the forgiveness of a PPP loan must attach a statement to their return titled "RP2021-48" including the following information about each loan received:
- The S corporation's name, address, and EIN.
- The amount of tax-exempt income from the forgiveness of the PPP loan.
- Which of the three sections is being applied, 3.01(1), (2), or (3), as explained above.
- Whether or not forgiveness of the PPP loan has been granted as of the date the return was filed.
S Corporation Return Entries
To enter the Rev. Proc. 2021-48 statement, from the Main Menu of the S corp return (Form 1120-S) select:
- Miscellaneous
- Preparer Notes - Select New and enter the statement as explained above.
To report the cancelled debt, select:
- Schedule B
- Non-shareholder Debt cancelled - Answer YES to the question
To report the tax-exempt income, select:
- Schedule K
- Items affecting Shareholder Basis
- Other Tax Exempt Income - Enter the amount.
An adjustment needs to be added to Schedule M-1 line 5. To enter this adjustment on Schedule M-1 select:
- Schedule M-1 - Reconciliation
- Other Income on Books Not on Sch K - Select New, enter a description, e.g., "PPP LOAN FORGIVENESS", and the amount.
An adjustment needs to be added to Schedule M-2 line 3 column (d). To enter this adjustment on Schedule M-2 select:
- Schedule M-2 - (AAA)
- Other Additions - Note the window heading. Press enter to shift from column (a) to column (d). When you're at column (d) the window heading will be "Statement for Other Additions (d)".
- Select New - Enter a description, then the amount.
If Schedule M-3 is being filed instead of Schedule M-1, a negative adjustment needs to be included in Part II in column (c) of line 22 if the positive amount is also included in column (a). To make this adjustment select:
- Heading Information
- Other Information
- Schedule M-3 is required
- Parts II and III Reconciliation Totals
- Total Income (Loss) Items
- Additional Income (Loss) Items
- Other income (loss) items with differences - Click New. Enter the income in column (a) and the negative adjustment in column (c).
Caveats
- The above Schedule K entry assumes you are automatically distributing Schedule K information to each shareholder's K-1. If you aren't automatically distributing Schedule K information you will need to enter each shareholder's share of the tax exempt income to their K-1 manually.
- The preparer note goes to the IRS in the e-filed return and is available to be printed in the View Results menu. If it's not included in the complete printed return, you can add it in the various business print options you use in program configuration. See here for more information on adding Preparer Notes to your business print options.
In the printed S corp return, the tax-exempt income is included here:
- Schedule K, Line 16b – Other tax-exempt income
- Schedule M-1, Line 5 – Income recorded on books this year not included on Schedule K, lines 1 through 10
- Schedule M-2, Line 3 Other Additions, column d
- Schedule M-3, Part II, Line 22, column (c) (if Schedule M-3 is used)
- Schedule K-1, Box 16, Code B
Additional Information: