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Accounting for COVID Grants and Loans

I am a bookkeeper and I have several clients that have received either grants or loans from EIDG/EIDL (Economic Injury Disaster Grant/Loan). I had to do a lot of research online to figure out the differences between these two. I want to make sure I am accounting for them both correctly and accurately for year end. How should the grants be setup versus the loans within the chart of accounts? Additionally, how does this work for the PPP Loan?

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    Hi, this is a great question as many people have wondered the same thing. The EIDG is the grant portion of the EIDL loan which does not have to be paid back. This amount can range from $1,000 – $10,000. The EIDG (grant portion) does not have to be paid back and should be recorded as “other Income” which would appear separate from the ordinary income of your clients. In the accounting world, this is referred to as “below the line income”. When you go to the chart of accounts to set this up you would choose the “other income” account. This amount will be taxable to your clients.

    The EIDL, which is the loan portion is expected to be paid back over 30 years. This loan will be placed in a Long-Term Liability account on the balance sheet. Long-Term liabilities are liabilities that will be paid back over a period of more than one year. When your clients start paying this loan back, you will apply the principle amount of the payment to the liability account and the interest portion of the payment to “Interest Expense”.

    For the PPP loan, this is a 2-step process. When the PPP loan is initially received it should be recorded as a liability. Although many PPP loans will be partially or fully forgiven until documentation is received stating that the lender has forgiven the loan, the expectation is that it will be paid back and therefore, should be set up as a long-term liability. This is long-term because we do not know if it will be a year or more before notification will be received regarding the loan and if it has been forgiven. If your client receives notification that the loan has been fully forgiven, at that time you should remove the expenses that were paid by the PPP loan from the income statement and post them against the loan. For example, if you have $20K in salaries, wages, and taxes that were paid out of the PPP loan that amount would be moved out of salaries, wages, and taxes and posted to the liability account which would then balance to zero. So while the PPP funds are not taxed directly, you are actually decreasing your expenses, therefore increasing your net income which will increase your tax liability. This same process would be applied if the PPP loan is not forgiven fully. You would apply the portion of the loan that has been forgiven to the liability account, reducing the expenses and the balance left should be the amount that has not been forgiven. At that time the lender will direct the client on how to make payments for the balance.

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