In final versions of instructions to Forms 1120S[1] and Form 1065,[2] the IRS has provided additional guidance on reporting PPP loan forgiveness on those forms using the methods outlined in Revenue Procedure 2021-48.

In Section 3.04 of Revenue Procedure 2021-48 the IRS noted that further instructions would be issued on how this should be reported, though taxpayers did not have to wait to use the procedure until that guidance was released:

04 Reporting consistent with this revenue procedure. The IRS will publish form instructions for the 2021 filing season that will detail how taxpayers can report consistently with sections 3.01 through 3.03 of this revenue procedure. However, taxpayers do not need to wait until the instructions are published to apply this revenue procedure.[3]

The instructions for Form 1120S provide that the tax-exempt income from the forgiveness of PPP loans should be reported on Line 16b of Schedule K, Form 1120S and Schedule K-1 of Form 1120S.[4] The instructions also provide the following requirements for the attachment:

Attach a statement to the S corporation return for each tax year in which the S corporation is applying Rev. Proc. 2021-48, sections 3.01(1), (2), or (3). The statement should also include the following information for each PPP loan.

1. The S corporation’s name, address, and EIN;

2. A statement that the S corporation is applying section 3.01(1), (2), or (3) of Rev. Proc. 2021-48, as applicable;

3. The amount of tax-exempt income from forgiveness of the PPP loan that the S corporation is treating as received or accrued during the tax year; and

4. Whether forgiveness of the PPP loan has been granted as of the date the return is filed.[5]

The instructions confirm that taxpayers who reported PPP loan forgiveness on their 2020 Form 1120S in accordance with one of the methods found in the Revenue Procedure do not need to file an amended return to add the statement:

An S corporation that reported tax-exempt income from a PPP loan on its 2020 return, the timing of which corresponds to one of the options presented in Rev. Proc. 2021-48, need not file an amended return solely to attach the statement that is described in the instructions for Schedule K, line 16(b).[6]

If the S Corporation reported forgiveness income on a tax return prior to receiving formal forgiveness and later discovers that a lesser amount was forgiven, Section 3.03 of Revenue Procedure 2022-48 provides that an amended return should be filed.[7] The 2022 Instructions to Form 1120S provide the following guidance in that case:

The S corporation should attach a statement to such amended return that includes the following information.

1. The S corporation’s name, address, and EIN;

2. A statement that the S corporation is making adjustments in accordance with section 3.03 of Rev. Proc. 2021-48; and

3. The tax year in which tax-exempt income was originally reported, the amount of tax-exempt income that was originally reported in such tax year, and the amount of tax-exempt income being adjusted on the amended return.[8]

The Form 1065 instructions contain similar instructions, though noting an Administrative Adjustment Request would be necessary rather than an amended return when reporting a change in the amount of PPP forgiveness exempt income if the partnership had not been eligible to or had not opted out of the BBA partnership audit regime for the year in question.[9]

The same requirement is found in the Form 1040 2021 instructions,[10] though it’s not totally clear what impact this has for most issues—the timing of the recognition of the tax-exempt income would generally not have an impact in the Form 1040 context.

As well, the Revenue Procedure allows taxpayers to report exempt income in three ways that the IRS has approved—but does not indicate these are the exclusive ways to report such income (just ways that will not be challenged by the IRS on an exam). However, since failing to follow the instructions in theory opens up a theoretical finding that the taxpayer had not filed a proper return, it will be best to comply with these requirements, even in the context of a Form 1040.

[1] Form 1120S Instructions, January 20, 2022, https://www.irs.gov/pub/irs-pdf/i1120s.pdf (retrieved January 14, 2022)

[2] Form 1065 Instructions, January 14, 2022, https://www.irs.gov/pub/irs-pdf/i1065.pdf (retrieved January 21, 2022)

[3] Revenue Procedure 2022-48, Section 3.04, November 18, 2021

[4] Form 1120S Instructions, January 20, 2022, p. 34

[5] Form 1120S Instructions, January 20, 2022, p. 34

[6] Form 1120S Instructions, January 20, 2022, p. 34

[7] Form 1120S Instructions, January 20, 2022, p. 34, Revenue Procedure 2022-48, Section 3.03

[8] Form 1120S Instructions, January 20, 2022, pp. 34-35

[9] Form 1065 Instructions, January 14, 2022, p. 43

[10] Form 1040 Instructions, p. 23, December 22, 2021, https://www.irs.gov/pub/irs-pdf/i1040gi.pdf (retrieved January 21, 2022)