I’m going to be talking about the taxability of the EIDL and treatment of the PPP and the EIDL in terms of taxes, and also how to account for both of these loan and grant programs in your books.
Taxability of the EIDL
So start off with the PPP how the tax treatment is and how to account for it on your books? So when you first get the loan, you get some money in your bank. So when you get the money in the bank obviously, you receive cash, right?
So the other side to that, if you know to account at all, there’s a debit and the credit side. So debit would be the cash side, the other side to it you would want to put it in what’s called a current liability type of account. And its current liability and you’re asking “Why is it the current liability if it’s paid back in five years?”
So if you don’t know, there’s current and long term liabilities. So current liabilities are resolved in one year or less and long-term liabilities are resolved over, in over one year.
So why are we putting this in current liability if it’s a five-year loan technically?First of all, it’s a five-year loan but it may be forgiven, okay? So there’s this contingency there that says we might be able to get this loan forgiven within 10 months, or you know within 10 months. So that’s why we’re putting it in current liability.
Once you apply for the loan to be forgiven and if it’s accepted and approved to be forgiven then we will do some re-classes which I’ll talk about right now.
So let’s say you have a $10,000 PPP loan and you put it in current liability and then you know, like eight weeks from now you apply for forgiveness and you got it approved. And now your loan is forgiven you don’t have to pay it back.
So what you do then if you’ve got the full $10,000 forgiven, you’re basically going to re-class that loan, that current liability, to a non-deductible expense account. And this is an account that you might have to create.
Whether you’re reusing Quick Books or Xero or whatever, you want to create a new account called “non-deductible PPP expenses”.
Why are we making just a general non-deductible expense account?
Well because basically if you got your PPP forgiven, that means that you used it properly for the expenses that you should have been using it for, which is why you were approved for it to be forgiven in the first place.
Let’s say you used the whole $10,000 for payroll, a common thing that you might think that you should do is reduce the payroll expense by $10,000 since you know, the pay, the forgiven PPP loan is not tax-deductible.
So your first thought would be to just reduce your payroll expenses. So what you want to do is just create an account called “non-deductible PPP expenses” and reclassify the current liability to that account. And just so if you’re not following, I just want to remind you that any expenses that you pay with the PPP is not deductible at the moment. That’s why we’re creating this account.
And we’re doing it so that when you give your financial statements to your tax preparer at the end of the year, they know to include that as a non-deductible item on your tax return. And so just, so just to be clear, that line item will show up as a negative expense.
So don’t be worried if it does, you know when you’re trying to re-class it, it should show up as a negative expense because it’s non-deductible. It’soffsetting your other expenses, Does that make sense?
So let’s say you got a portion of the loan forgiven. Let’s say you got $8,000 forgiven$2,000 you were not able to get forgiven because you used it on like,I don’t know. So $8,000 you would move to the”non-deductible PPP expense” account. The other $2,000 you would move to your long-term liability account.
Now it’s long-term because now you paid it off in either two years or five years, whatever you elect, but it’s greater than one year. So now it’s a long-term liability.
And so now any payments you make to it will be split into principal and interest, obviously. So the principal portion would directly reduce that long-term liability amount of $2,000 and the interest portion is an expense that goes on your P&L, on your profit and loss statement.
The way you determine that split, you would have to use what’s called an amortization table based on your loan amount, based on the interest rate, and based on the term. You can find those all over the internet.
So, I won’t get into much detail about that.The amortization table and the payment splitting can get confusing. We’re clear on the PPP and how it’s handled for expense tracking for the PPP.
I would just track it like normal like don’t do anything different in your books if you had your PPP in a separate checking account that was good for forgiveness to prove forgiveness to solidify what you paid for.
With PPP for expense tracking, you don’t do anything differently if you’re using QuickBooks or Xero or some other accounting software. Keep doing that if you want to keep in a separate spreadsheet or something the expenses that you paid with the PPP.
You may do that as well i mean just whatever you want to do as long as you can substantiate it all right so don’t change anything there and one reason why i don’t want you reducing your actual expense account by the PPP funds that you use to pay for.
Let’s say you use a PPP to pay for salary. Your 10000 PPP that i mentioned earlier you paid it you used to pay for your salary and let’s say your salary for the year is 50000. If you’re trying to budget for next year if you’re trying to plan for next year. You want to see that you actually pay fifty thousand dollars in salary when you’re looking at your financial statements.
If you don’t know about that it’s don’t worry you’ve most likely already been taking advantage of it. It’s the new deduction that was put into place by the trump tax reform it’s what you hear that’s the 20 deduction for pass-through business entities like sole proprietors, LLC’s, partnerships and S-Corps.
You get a 20 deduction based on your net income and that deduction is limited based on your age. if you’re a certain type of business so that limitation can be based on salaries paid in your company so if you’re reducing the amount of salaries paid or the reported salaries paid that’s going to affect the limitation of your QBI deduction and you don’t want to do that that QBI deduction is good for you.
You don’t want to further limit your QBI deduction. that’s why we’re putting the forgiven ppp amountin just a separate expense account altogether it’s going to show up as a negative expense but that’s okay because you’re going to have your full wages reported against your full rents reported on your financial statements.
We’re going to talk about the e-idea which is also really important. It’s a little more simple than the PVP. Actually a lot more simple but important to note. So first we’ll talk about the e-ideal loan.
You receive the loan it’s going to be a long-term liability because there’s no tricky or funny business here it’s a up 30-year loan so when you get it you’re going to debit cash you’re going to credit long-term liability and it’s going to stay there until you start making payments.
Same with the PPP part. your payment is going to be partially principal and partially interest and the principal portion is going to reduce the long-term liability accounts by the principal portion and the interest portion.
When you make payments on it you just account for the payments in that way so the EIDO grant i get questions on whether or not it’s taxable and the EIDO grants is a taxable item slightly different from the PPP where the PVP is not taxable income but the expenses that you pay with the PPP is not deductible.
The grant is a little different the grant is just considered a taxable income. It shakes out to be the same thing but the way that you report it is it’s different so when you receive the grants you’re going to get cash in your bank debit to cash.
Let’s say it’s a thousand dollars debit a thousand dollars to your cash account the credit side would just be other income it’s this can be other income other EIDO grants income or whatever you want to call it. It will be in an income or revenue accounts if you want to go a little deeper if youwant to get into more detail this grants is not part of your operations so it should go it should fall below your operating income on your income statement on your profit and loss.
That’s for more for your more advanced users if you care about that that’s just where it should go because it’s not part of your operating your day-to-day operations. It should go below the line other income to answer many of your questions the EIDO grants is taxable.
The ideal loan is not taxable and the expenses that you use to pay with the EIDO loan are still deductible because you still have to pay back the EIDO loan The loan itself is not income the expenses that you pay with it are not are still deductible which means the loan is just a loan you receive the money you’re gonna pay it back.