Confused about the Taxability of your COVID Grants? Your not alone. Facts About COVID-19 Bookkeeping and the CARES Act SBA EIDL Grant

Bookkeeping and the CARES Act SBA EIDL Grant

I discussed a few options for how to post PPP funds received and spent in the past.  For this article, I am returning to the subject of the SBA’s EIDL $10,000 Grant.

Mike McVay, 850-725-5696 - Small Business Expert

www.PensacolaFLTax.com

​First off, the CARES Act EIDL Grant is an emergency grant of up to $10,000, up to $1,000 per employee. Sole proprietors, for example, received $1,000.
Per the AIPB (American Institute of Professional Bookkeepers), “Proceeds can be used for such purposes as providing sick leave to employees unable to work due to the direct effect of COVID-19, maintaining payroll during business disruption or a substantial slow down, meeting increased costs of materials due to disruption of the supply chain, making rent or mortgage payments and repaying obligations that can’t be met due to revenue losses.”
EIDL Grant Notes

• The CARES Act EIDL $10,000 grants are different than the normally-available SBA EIDL loans.
• The CARES Act SBA EIDL program is currently closed, and is not accepting new applications.
• If a business has received both the EIDL and PPP funds, EIDL funds cannot be used “for the same purpose” as the PPP loan. Here’s a good example from the website of Husch Blackwell law firm: “For example, if the business used the EIDL to cover payroll for certain workers in April, it cannot use a PPP loan for payroll for those same workers in April, although it could use it for payroll in March or for different workers in April.”

Is the SBA EIDL Grant Taxable Income?
​There seems to be conflicting information on this. A recent article, titled“7 Questions About PPP and EIDL the SBA and Treasury Need to Answer ASAP” (bullet point #5) says “Yes” for regular pre-COVID-19 EIDL loans, but suggests there is ambiguity for the CARES Act SBA EIDL Grant.
That being said, most sources I have consulted indicate the CARES Act SBA EIDL Grants are tax-free money. That may change in the future, but this is my understanding as of today.

How to Book SBA EIDL Income
​By now, many of our clients have received their SBA EIDL funds. Per the SBA website, while they are referring to it as a “loan,” the website clearly says, “This loan advance will not have to be repaid.” Since this is not a loan to be repaid, a liability account does not need to be created on the Chart of Accounts.
Instead, I recommend creating an “Other Income” account, which appears at the bottom of the P&L, not at the top. Suggested account name: SBA EIDL Grant-Not Taxable
One colleague even posited that since the EIDL is not a loan, and is not taxable, that it does not even need to appear on the P&L. It could instead be posted to the Balance Sheet as Owner’s or Shareholder Contribution. I am not in agreement with that approach, and instead recommend the P&L entry as noted above.
ConclusionThe above suggestions are for those who received just $10K from the SBA. However, many businesses did apply for, and receive, more. In those cases, a Long Term Liability account should be setup on the Chart of Accounts for the loan, and when the $10K portion is forgiven by the SBA, an adjusting entry can be made to move $10K from the loan liability account to Other Income.

Mike McVay is a degreed accountant with over 25+ years running and working with small businesses., a QuickBooks® Certified Pro Advisor, and a member of the Intuit elite network.  His company, McVay Business Services in Pensacola, FL, specializes in remote bookkeeping services, QuickBooks clean-up and set-up, monthly and quarterly bookkeeping and individual, corporate and LLC income tax preparation. You can find his series of Blog posts here....