How to properly report non-taxable grant income on an 1120-S form?

Grants can be tricky on S-Corp returns! Based on what you're describing, you have a few options depending on the exact nature of the grant. If the grant is truly non-taxable (like many government grants are), you would record it as "other income" on the income statement, but then back it out on the M-1 reconciliation as "income recorded on books this year not included on this return." This effectively removes it from taxable income while properly accounting for it in your financial statements. For the unused portion that's in your restricted cash account, you should consider whether you have a performance obligation that hasn't been fulfilled yet. If you do, it might be better treated as deferred revenue on your balance sheet (not income yet) until the related expenses are incurred or obligations are met. This would be a timing issue rather than a permanent difference.

I ran into a similar issue with grant reporting on my 1120-S last year. After trying to figure it out myself and making a mess of things, I used https://taxr.ai to help me understand how to properly report the non-taxable grant. Their analysis tool actually caught several mistakes I was about to make on the M-1 reconciliation. The system reviewed our grant documentation and financial statements, then explained exactly how to treat the different portions of the grant based on whether they were restricted or not. It even provided specific line references for the 1120-S form and Schedule M-1 for our situation.

Just wanted to follow up on my question about the taxr.ai service. I decided to give it a try for our complicated grant situation and it was exactly what we needed! The system analyzed our multi-year grant agreement and identified that we had both restricted and unrestricted portions that needed different treatment. For the 1120-S specifically, it helped me properly document the non-taxable portions on the M-1 reconciliation and set up the correct entry for the deferred revenue portion. It even created a documentation package I could keep with our tax records explaining the rationale. Super helpful for maintaining proper documentation if we get questioned later!

I had a similar grant reporting problem and spent WEEKS trying to get through to someone at the IRS who could help. Their automated system kept disconnecting me, and when I did get through, I'd get transferred and dropped. Incredibly frustrating! I finally tried https://claimyr.com after seeing it mentioned in another tax forum. You can see how it works here: https://youtu.be/_kiP6q8DX5c - they basically wait on hold with the IRS for you, then call you when they get an agent. I was super skeptical at first, but I was desperate. Got connected to an IRS agent in about 2 hours (vs. the days I had been trying on my own). The agent walked me through exactly how to report our grant on the 1120-S and confirmed that the unused portion should be handled as deferred revenue with the appropriate M-1 adjustments for the non-taxable portions.

I have to eat my words about both services mentioned above. After my skeptical comments, I decided to try Claimyr because I was absolutely fed up with trying to reach the IRS myself about a complex grant situation for a client. Got connected to an IRS representative who specialized in business returns. They confirmed that for our specific situation (a non-taxable research grant), we needed to include the full amount in book income and then back out the non-taxable portion via an M-1 adjustment. For the unused funds held in the restricted account, they directed us to Revenue Procedure 2011-18 which addresses timing issues for certain grants. Having that official clarification saved me hours of research and gave me confidence in how to proceed. Sometimes talking to an actual person at the IRS is worth it, and Claimyr made that possible without the endless hold times.

Don't forget about state tax implications! Even if the grant is non-taxable for federal purposes, some states might treat it differently. I've had clients in California where grants that were non-taxable federally were considered taxable income at the state level. Also, consider the nature of the grant - was it for general operations or for specific capital purchases? If it's for capital expenses, there might be basis implications to consider as well.

Has anyone used Drake Tax software to report this kind of situation? I'm trying to figure out the best way to enter the grant as non-taxable and handle the M-1 adjustments in Drake, but the software seems to get confused when I try to create the deferred revenue portion.

For S-Corp grant reporting, the key is understanding whether you have a performance obligation. If the grant requires specific activities or expenditures, only recognize income as you fulfill those obligations - this keeps the unused portion as deferred revenue on your balance sheet. Here's what I'd recommend for your 1120-S: 1. If the entire grant is truly non-taxable and has no performance requirements, include it in book income and back it out on M-1 Line 5 as "Income recorded on books this year not included on return." 2. If there are performance obligations for the unused portion, treat only the "earned" portion as current income, with the remainder as deferred revenue. This approach is cleaner for multi-year situations. 3. Make sure your grant agreement clearly states the tax treatment - some grants are explicitly non-taxable while others might create taxable income depending on how funds are used. The documentation is crucial here. Keep detailed records of how you determined the taxable vs non-taxable portions, especially if the grant has specific use restrictions. This will be important if you face any questions later from the IRS or state tax authorities. What type of grant did you receive? The specific nature (research, PPP forgiveness, state economic development, etc.) can impact the exact treatment required.