Wondering how to account for COVID-19 assistance? Your accountant will have more details for you. To help you prepare, here are a few notes on what to expect.
The struggle to stay afloat during the global pandemic has forced a lot of small business owners to turn to both the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) program for assistance.
The financial relief these programs provide comes with a little bit of financial angst, however. Restrictions applied to the funds require business owners to keep track of every dollar they spend. As Richard McKay of McKay Tax & Accounting said, “If bookkeeping isn’t your strong suit, it’s easy to get overwhelmed.”
Here are some best practices you can follow that should make the job easier:
Understand the Difference Between the PPP and the EIDL
If your business is eligible, you can get both the PPP and the EIDL and use them together — just not for the same purpose, and not out of a co-mingled pot.
- PPP funds have to be split 60/40, with 60% going to payroll and employee benefit costs. The other 40% has to be used for business expenses like your mortgage interest or rent payments, and utility bills.
- EIDL funds can be used for a broad variety of financial obligations you would normally have been able to meet if the pandemic hadn’t happened, including things like your inventory, bookkeeping services, your accounts payable, web hosting, and advertising costs.
The PPP can ultimately be forgiven, but only once you’ve proven how the money was spent. The EIDL advance payment is a non-taxable grant that never has to be repaid, but the remaining funds are merely a loan, so use them sparingly.
Stay on Top of Your Records for Both Loan Programs
You will ultimately be required to show how you spent these funds, so you cannot afford to get behind on your records. If you don’t have a good bookkeeping system in place already, it may be wise to start working with an experienced accountant right away.
In the meantime, you can make things easier on yourself by:
- Putting your PPP money and EIDL money into separate business accounts that are easy to monitor. That way you won’t accidentally spend the funds on anything unallowed.
- Keep track of the basics for every transaction you make, including the category of each expense, the date of the transaction, and the method of payment.
- Retain documentation of every bill via receipts, canceled checks, or invoices.
Aim for simplicity and clarity in your books right now, because that’s the best way to handle the rigors of the loan requirements and accomplish your goals.