Tax Treatment of the Economic Injury Disaster Loan (EIDL)
Many organizations, big and small, have felt the financial impact of the pandemic. Financial aid packages are available to ease the strain and help these organizations survive this tumultuous time. Today, we will focus specifically on the Economic Injury Disaster Loan (EIDL). We have received a lot of questions surrounding the EIDL. Is the EIDL taxable? What can the EIDL funds be used for? What is the penalty for misuse of EIDL funds?
The EIDL is a long-term direct loan program from the SBA. The purpose of the EIDL is to help cover normal operating expenses, such as utilities, rent, fixed debt payments, and continued health care benefits. Businesses can qualify to receive up to $2mm, including a $10,000 cash advance. The EIDL loan comes with a fixed APR of 3.75% (2.75% for non-profit organizations), and a 30-year term.
Is the EIDL taxable?
The EIDL is not a forgivable loan. Therefore, the funds received are not taxable. However, if you received an emergency cash advance of the EIDL, up to $10,000, it is taxable. The cash advance portion is considered a grant and does not have to be repaid. Therefore, the cash advance portion of the EIDL you received is taxable.
What can the EIDL funds be used for?
EIDL funds can be used to pay:
- Regular bills
- Fixed debts
- Payroll
- Accounts payable
EIDL funds cannot be used to pay:
- Dividends and bonuses
- Disbursements to owners (unless for the performance of services)
- Repayment of stockholder/principal loans
- Expansion of facilities or purchasing fixed assets
- Paying off debt owned by a federal agency or SBA
- Paying any direct federal debt, except IRS obligations
- Refinancing long-term debts
- Relocation
What is the penalty for misuse of EIDL funds?
If EIDL funds are used inappropriately, the penalty is immediate repayment of one and a half times the original loan. To avoid incurring this steep penalty, we recommend you read your loan documents carefully to ensure you fully understand the appropriate use of the funds you received.
Summary
The Economic Injury Disaster Loan (EIDL) is a long-term loan that is designed to help businesses cover their normal operating expenses during the world-wide pandemic. The EIDL comes with a list of specific rules that must be adhered to.
This is not legal advice. Please consult your lender and carefully read your loan documents to ensure adequate understanding and proper use of the funds.