So there are two ways to report an EQIP grant. (I like the second but I'll tell you both) Before you report it, though, you need to have the expenses that are associated with it for improving the water and environment separated out.
Then, in option one, you just don't report the grant. If it is spent on improving the water and soil it isn't taxable and any expenses that it is spent on are not deductible. So you just leave it off.
The other option is to report it using the 1099-G input and then enter an expense on the schedule F that that generates that is exactly equal to the amount of the grant. The expense should be called "Environmental Quality Improvements." And it wipes out the taxable income.
Like I said, I like option two because it keeps the IRS from asking questions. But either option is perfectly legit.
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