Navigating the accounting portion of all the Federal benefits from the CARES Act bill.
reading time: 04:02 minutes
2020 is a year no one will forget. We’re more connected than ever, and facing the biggest epidemic of the past 100 years. I know, I don’t know how it’s May already – the time is going by so slow and so fast.
And we’re learning, learning how to work remotely, learning how to entertain ourselves at home and how to enjoy the simple things in life.
We’re also learning how to put others first, we’re learning to sacrifice a little of our “freedoms” to save lives. We are learning how to grief from a distance.
Let me stop all the rumbling and get to the nitty-gritty. The U.S. government released the CARES ACT Bill in late March to help Americans – individuals and small businesses – financially.
We all applied for the EIDL loan, which had a grant that you could request when finishing the application. We all applied for the Paycheck Protection Plan (PPP) that had to be refunded.
Now that the funds are into your business bank account – how to record it and what do to with it?
If you have a bookkeeper or accountant (or if you are one of my clients), you can trust that your financial professional will take care of it.
(but don’t take my word for it – talk to them, or me 😉)
If you are DIY your bookkeeping, this is all so confusing. How do you record a loan? how do you record a grant? What is the difference between a loan and a grant? what does it mean for a loan to be forgiven? What do I need to do for my loan to be forgiven?
I got your back, my friend. Let’s cover one thing at the time.
1. Difference between “Loan” and “Grant”
A loan is money borrowed. Is the money you need to repay, usually with an interest rate. Loans are very common in the business world. You, most of the time, need to pay taxes on the loan given to you.
A grant is a money given to you. You do not need to pay it back. Usually, you do need to pay taxes on the grant. So, you don’t need to pay the grant back, but you need to pay income tax on it.
This COVID-19 EIDL grant is a bit different, it will not count as taxable income – so no taxes paid on it! It’s FREE FREE money.
2. How to record your EIDL Grant
Now you got that FREE FREE money. Yay! This will help your business so much because, stay-at-home-order.
You need to record it as “Other Income”. Why? Because it’s income from not so usual sources.
The EIDL loan has no strings attached, you can used it as you please for your business. You can use to get some DIY Bookkeeping training (yeah babe… this is so important!), to invest in your business, to shop small business. You know the gist.
I would add a note “COVID-19/CARES Act EIDL Loan” so you know exactly what this is 5 years from now.
3. How to record your PPP Loan
The (in)famous Paycheck Protection Plan – that Payroll help for small businesses.That one that Shake Shack returned $10 Million.
I will not get to the why’s, how’s of this plan. That had to be refunded because not so small businesses get approved for those funds before us, the real small guys.
If you use an accounting system, you will need to create a “Liability account”. (You can check my blog post on how to choose your accounting system by clicking right here).
Liability is pretty much the things you owe. Once you create that account, you add the loan amount in and transfer it to your business bank account.
The Cares Act bill states that the PPP has a 6 months deferral (fancy word for pushed back) and a 1% interest rate.
Plain English? You will only need to start repaying your loan 6 months from when it’s granted (aka given to you).
If you use a spreadsheet, add “PPP Loan” as a transfer. This is not income. At least not yet.
4. What is “forgivable” Loan?
You know when you forgive your partner for forgetting your anniversary? This is it. But bettter.
Certain loans can are considered forgiven. Which means that you do not need to repay them.
Yes, if you’re paying attention, this is a GRANT. Forgiven loans are similar to grants in that way.
Most of the time, you need to meet certain criteria for your loan to be forgiven. It can be the hardship you’re facing and how you use those funds.
So, a “forgivable” loan has strings attached.
5. How to track the expenses from your PPP to make it forgivable?
The big thing about PPP is that this can be forgiven. This makes things waaay more interesting.
To apply for the PPP loan you need to show financial hardship due to COVID-19. This can be canceled contracts, lost of income, non-essential businesses that needed to close.
The CARES Act bill says that if you:
- use the funds within 8 weeks of being approved-
- 75% for payroll expenses
- 25% for rent and utilities
The loan can will be forgiven, in total or partial.
And the good part is, if your loan is partially forgiven, you can give the rest of the money back without any penalties.
All that, is very unusual. This is the government trying to help us stay open and keep people out of unemployment.
Remember that you will need to prove where those monies went.
My, very OCD, recommendation is: keep that paper trail.
Save your rent, internet, phone, electricity bills that you’re paying (for the 25%). Keep track of your payroll tax documents, wages paid, benefits paid, etc.
This will help you being able to grab whatever information your bank will need to prove where the loan money went.
Now that you understand a little more of the ins and outs of all the welfare the government has given us, let’s keep those financial records updated and support other small businesses.