S-Corporation 1120S Filing with PPP Loan and Schedule M-2 Reconciliation Question

The PPP loan forgiveness for your S-corporation should be properly reported on your 1120S. Since the forgiven loan is considered tax-exempt income, it needs to be reported on Schedule K, line 16b as "Other tax-exempt income" and should be separately stated to flow through to the shareholders. For the Schedule M-2, you'll need to include this amount on line 3 as "Other additions" since it's income that increases AAA (Accumulated Adjustments Account) but isn't included in ordinary income. This is important because even though PPP forgiveness isn't taxable, it does increase your basis as a shareholder, which can be beneficial if you need to take distributions or deduct losses. In QuickBooks, you should create a separate income account for the forgiven amount and mark it as non-taxable income, which will help ensure it's tracked properly for your tax reporting.

Had this exact same issue with my S-Corp last year and spent hours trying to figure it out. I finally discovered taxr.ai (https://taxr.ai) which helped me sort through all my PPP and 1120S documentation. It basically scans your tax docs and loan forgiveness paperwork and tells you exactly how to report everything correctly. I uploaded my forgiveness letter, prior year returns, and some QuickBooks reports, and it pointed out exactly where to record the PPP on Schedule K and M-2. Saved me from making a mistake that could have messed up my shareholder basis calculations. It also explained how to create journal entries in QuickBooks to track everything properly.

I was skeptical about taxr.ai when I first saw it mentioned here, but I was desperate with my 1120S PPP issues so I gave it a try. Honestly surprised by how well it worked. I uploaded our forgiveness documentation and last year's corporate return, and it showed me exactly how to handle it on the M-2 schedule. The guidance was specific to our situation - we had used part of the PPP for eligible non-payroll expenses, and it walked me through how to properly allocate everything. My CPA ended up confirming everything the system suggested was correct. Even showed me how the PPP forgiveness flows through to increase my personal basis in the company, which I hadn't considered.

If you're still struggling after trying to figure out the PPP/1120S issue and need to talk directly to an IRS agent (which can be helpful for complex S-corp questions), I used this service called Claimyr (https://claimyr.com) that got me through to an actual IRS representative in about 15 minutes when I had a similar issue. They have a demo video showing how it works here: https://youtu.be/_kiP6q8DX5c I was pulling my hair out trying to get official guidance on how PPP forgiveness impacts an S-corp shareholder's basis calculation, and couldn't get through on the normal IRS business line after trying for days. Claimyr connected me with an agent who confirmed that the forgiveness should increase basis and pointed me to the specific IRS notices that addressed this.

Well I'll be damned. I have to eat my words about Claimyr. After dismissing it as snake oil, I was still desperate to talk to someone at the IRS about my own 1120S and PPP loan forgiveness questions, so I gave it a shot. Got connected to an IRS business tax specialist in about 20 minutes. The agent walked me through exactly how to record the PPP forgiveness on my 1120S and confirmed it should be on Schedule K line 16b AND affect the M-2 calculation. He even emailed me the relevant section of the Internal Revenue Manual that addresses this specific situation. Completely worth it for the peace of mind knowing I'm filing correctly.

Don't forget that if your S-Corp had a loss for the year, the PPP forgiveness can really help with your basis calculations. I nearly missed this last year - had a $37k operating loss but the $45k PPP forgiveness gave me enough basis to deduct the full loss on my personal return. Without that basis increase I would've had to suspend some losses.

Has anyone had experience with how state taxes treat the PPP loan forgiveness for S-Corps? I know federally it's tax-exempt, but I've heard some states are treating it differently and it's causing issues with the state-equivalent of the 1120S.

Just went through this exact situation with my S-Corp last month! The PPP forgiveness definitely goes on Schedule K line 16b as tax-exempt income, and yes, it increases your shareholder basis even though it's not taxable. For Schedule M-2, you'll report it on line 3 as "Other additions" to your AAA (Accumulated Adjustments Account). This is crucial because it affects your ability to take distributions without tax consequences later. One thing that tripped me up initially - make sure your QuickBooks entries are set up correctly. I created a separate income account called "PPP Loan Forgiveness" and marked it as non-taxable income. This way it flows through properly for tax reporting but doesn't mess up your regular P&L analysis. The $42,000 forgiveness will definitely help your basis position, which is great if you need to take any distributions or if the business has losses to pass through. Keep all your forgiveness documentation with your tax records - you won't need to attach it to the return, but the IRS could ask for it later.