Can I Use My EIDL Loan to Pay Taxes?

Lauren WardUpdated May 2, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

The U.S. Small Business Administration (SBA) provides disaster relief loans to businesses whose operations are impacted by federally declared natural disasters. The program is called the Economic Injury Disaster Loan (EIDL) program. In 2020, the SBA launched a separate EIDL program for COVID-19 relief. Both programs are meant to address different challenges. Consequently, each one has its own rules about how the funds may be used. New guidance from the SBA states that COVID-19 EIDL funds may be used to pay federal tax debt. But regular EIDL funds may not be used for taxes. Here’s everything you need to know about correctly using funds for both EIDL programs. Recommended: What to Do if You Can’t Pay Your Pandemic Business Loan

Can You Pay Taxes With Your EIDL Loan?

The different types of EIDL loans have different rules for using the loan funds to pay taxes.

Traditional EIDL Loan

If you’re wondering whether you can use an EIDL to pay taxes, you may not like the answer. Unfortunately, traditional EIDL loans do not allow borrowers to use the funds to pay taxes. The goal of an EIDL is to cover operating expenses that could have been paid if the business hadn’t been interrupted by a natural disaster. Neither federal nor state taxes fall under this category.

COVID-19 EIDL Loan

Originally, borrowers were also not allowed to use COVID-19 EIDL funds to pay taxes. However, on September 8, 2021, the SBA announced a number of policy changes regarding the loan program. One change was an expansion of how the funds could be used, including allowing borrowers to use the funds to pay federal debt.This expansion gives business owners much more flexibility in how they’re able to manage their cash flow priorities. Since COVID-19 EIDL payments can be deferred for the first two years, the expansion allows business owners to catch up on tax payments without incurring late penalties while they wait for the economy to normalize.

How Can You Use EIDL Loan Funds?

You might not be able to use traditional EIDL funds to pay your taxes, but there are plenty of other expenses you can cover. Like many small business loans, EIDL funds can be used for working capital costs, including:

Health care
Rent
Utilities
Payments on fixed debt

So even though you can’t use your traditional EIDL loan funds for taxes, you may be able to use them for eligible operating expenses so you can free up capital elsewhere and cover your tax payments. For COVID-19 EIDL loans, the SBA published the following list of eligible working capital expenses:

Payroll
Rent or mortgage
Utilities
Payments on any business debt
Other ordinary business expenses
Federal debt

This list is slightly more robust than the standard EIDL loan because business owners can pay off federal tax debt, as well as any other type of business debt — not just fixed payments.Recommended: How You Can and Cannot Use Your EIDL Loan

Which Tax Payments Can You Use EIDL Funds For?

Traditional EIDL funds can’t be used to pay taxes.With COVID-19 EIDL loans, you can use the money to pay only federal tax debt. Any local or state taxes owed must be paid with other qualifying funds. Again, some business owners may be able to use EIDL funds for eligible expenses, then use remaining capital to make tax payments.

Do You Have to Pay Taxes on EIDL Funds?

EIDL loans are not taxable as income. That’s because they are loans and must be repaid over time. Any interest payments may be used as a business tax deduction. Additionally, EIDL loans are not forgivable. They do need to be paid back according to your loan agreement. This policy is different from the SBA’s policy for its Paycheck Protection Program (PPP). If they meet certain eligibility requirements, some PPP borrowers could get the full amount forgiven. However, you don’t have to pay federal taxes on PPP loans, even if they’re forgiven. Some states, however, do treat the funds as income and require small businesses to pay taxes on forgiven PPP loans.

What Can’t You Use EIDL Funds for?

EIDL funds must be used for the qualifying operating expenses listed earlier. Any other purposes are not eligible.Additionally, certain types of companies are not allowed to apply for EIDL loans. This includes businesses involved in:

Loan packaging
Speculation
Multi-sales distribution
Gambling
Investment
Lending
Illegal activities

COVID-19 EIDL LoanAdditionally, the SBA guidelines for COVID-19 EIDL loans specifically prohibit using the funds for any of the following:

Business expansion
Prepayments on federally owned debt (including loans through SBA or an SBIC)
New business launch

Looking for Other Loan Options for Your Small Business?

There are plenty of ways to find financing for your small business, whether you need to pay taxes or fund other projects. Consider some of these options in addition to or in lieu of EIDL loans.

SBA loans: The SBA offers several different types of loans for small businesses, often with competitive terms.
Term loan: This is flexible financing that lets you use the funds for nearly anything.
Invoice financing: Ideal for companies with a high volume of customer invoices, this option requires you to work with a specialized company. The financing company gives you an advance on outstanding balances.
Equipment financing: This is a way to finance purchases ranging from heavy machinery to medical equipment. The asset you’re buying is used as collateral on the loan.
Merchant cash advance: Designed for companies with point of sale transactions, the loan is repaid by docking a portion of sales, typically each day.
Personal loan: If you don’t have an established company, you may explore personal loan options to use for your startup funds.

Recommended: Everything You Need to Know About EIDL Fraud

The Takeaway

A COVID-19 EIDL loan let you pay for federal taxes with the borrowed funds. But that doesn’t mean there aren’t other ways to get your business back on track. If you decide to look at other types of small business financing, consider using Lantern by SoFi. You can access an exclusive match from our lender network.

Photo credit: iStock/dpVUE.images

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About the Author

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.

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