How to Report PPP Loan Forgiveness on Form 1065

The Paycheck Protection Program (PPP) provided a financial bridge for many businesses, and for partnerships, reporting this assistance involves specific steps on Form 1065, the U.S. Return of Partnership Income. The program allowed for loan forgiveness if funds were used for qualifying expenses, creating a unique reporting situation. Understanding the accounting and tax reporting requirements is necessary for accurate compliance.

Federal Tax Treatment of PPP Loan Forgiveness

The federal government established a distinct tax treatment for forgiven PPP loans through legislation such as the CARES Act and the Consolidated Appropriations Act. The primary principle is that the forgiven loan amount is excluded from the partnership’s gross income for federal tax purposes. This means the funds received and forgiven do not result in taxable income for the partnership.

A second core principle relates to the business expenses paid with these forgiven funds. The laws explicitly allow partnerships to deduct the ordinary and necessary business expenses funded by the PPP loan. These deductible expenses include costs like payroll, rent, mortgage interest, and utilities. This legislative clarification ensures that partnerships receive the full benefit of their deductions.

Information Needed for Reporting

Before beginning the tax return, a partnership must gather specific documentation. The most important document is the official confirmation from the lender or the Small Business Administration (SBA) that the loan has been forgiven, which should be retained with the partnership’s tax records.

With the confirmation in hand, the next piece of information is the exact dollar amount of the loan that was forgiven. This figure is the basis for the tax-exempt income that will be reported on the partnership’s return. It is also necessary to have a detailed summary of the eligible business expenses that were paid for with the PPP loan proceeds.

How to Report Forgiveness on Form 1065

The process of reporting PPP loan forgiveness on Form 1065 involves entries on several parts of the return. First, the deductible expenses paid with the loan funds are reported on their standard lines on the first page of Form 1065. For instance, payroll costs are entered on Line 9, “Salaries and wages,” and rent payments are entered on Line 13, “Rent.” There is no special notation on these lines to indicate they were paid with PPP funds; they are simply claimed as regular business deductions.

The tax-exempt income from the loan forgiveness is handled separately. This amount is reported on Schedule K of Form 1065. Specifically, the forgiven amount is included on Line 18b as “Other tax-exempt income.” The IRS requires a specific statement to be attached to the return, titled “RP2021-48”. This statement must specify the amount of tax-exempt income, which timing provision the partnership is applying, and confirm whether the loan has been formally forgiven by the date the return is filed.

From Schedule K, the tax-exempt income is allocated to each partner on their individual Schedule K-1 (Form 1065). The amount is reported in Box 18 of the K-1 with the code “B.” This informs each partner of their share of the tax-exempt income, which they will need for their personal tax records and to calculate their basis in the partnership.

Finally, the tax-exempt income must be accounted for on Schedule M-1, “Reconciliation of Income (Loss) per Books With Income (Loss) per Return.” The forgiven loan amount is entered on Line 5, which is for “Income recorded on books not included on Schedule K.”

Adjusting Partner Capital Accounts

The tax-exempt income generated by PPP loan forgiveness has a direct impact on each partner’s capital account and their basis in the partnership. This adjustment is equal to the partner’s distributive share of the tax-exempt income. This step is important because a partner’s basis affects the tax treatment of distributions and the deductibility of partnership losses.

This increase must be reflected in the partnership’s financial records and on the tax return. On Form 1065, this is shown on Schedule M-2, the “Analysis of Partners’ Capital Accounts.” The total amount of tax-exempt income from the PPP forgiveness is included in Column (d), “Other increases.” The increase flows through the schedule, contributing to the end-of-year capital account balance for each partner, which is reported in Column (g).