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Can I Use My EIDL Loan to Pay Taxes?

Can I Use My EIDL Loan to Pay Taxes?
Lauren Ward

Lauren Ward

Updated October 26, 2021
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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. 

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 online 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.

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 Loan

Additionally, 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

Qualifying for EIDL Funds

In order to apply for a traditional EIDL loan, you must have a small business located in a declared disaster area. COVID-19 EIDL loans are for small businesses directly impacted by the pandemic, with the application window ending on December 31, 2021.There’s no advertised minimum score for traditional EIDL loans, but the SBA does have  EIDL credit score requirements in place.COVID-19 EIDL applicants must meet the following credit criteria:
  • 570+ for loans $500,000 or less
  • 625+ for loans over $500,000
If you’re denied an EIDL loan, it may be possible to get a second chance by submitting a reconsideration letter within six months of the initial application. The SBA will tell you why the application was denied, so you can submit documentation to try and get the decision reversed.You can also apply for an EIDL loan multiple times if one of the following situations applies to your business:
  • You were initially denied.
  • You are applying for financing due to a separate disaster.
  • You are eligible for more COVID-19 EIDL loan funds since the loan limit increased in either April 2021 or September 2021.
So if your business was damaged because of COVID-19 and a federally declared disaster occurred in your area, you could qualify for two separate EIDL loans.

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 qualify for a personal loan to use for your startup funds. 

The Takeaway

Only a COVID-19 EIDL loan lets 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 a variety of quotes from our lender network to compare multiple options and structures based on a single prequalification form.
Photo credit: iStock/dpVUE.images
This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice. The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC0921184

About the Author

Lauren Ward

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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