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- After getting approved for an Economic Injury Disaster Loan (EIDL) from the federal government, I was concerned about what I could and couldn't use the funds for.
- One clearly acceptable use is to pay the IRS.
- Using the funds to pay my taxes freed up my personal savings to pay other debt, like credit card debt accumulated during the pandemic.
- See Business Insider's picks for the best tax software »
Like many small businesses, my writing company has been rocked by the pandemic. Right now, my income is totally unpredictable — some months this year my income has been down 25%, but there have also been times when I'm busier than ever. That's definitely better than a steady downturn, but the unpredictability makes planning anything difficult.
That's why I was so grateful when I was approved for a loan through the Small Business Administration's Economic Injury Disaster Loan (EIDL) program. The loan is available to businesses in the US that have been impacted by the coronavirus pandemic. For me, having the security of the loan was a huge relief, even if I didn't know exactly how I would use the funds.
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A long wait, then approval
I filled out the application for the EIDL program back in March. Then I heard nothing for weeks on end. With all the problems riddling SBA programs, I figured my application had been lost.
I was pleasantly surprised when I got an email from the SBA on May 30, announcing that my loan had been approved. I hadn't even asked for a specific amount, but when I logged in I was shocked to see I was approved for a $39,000 loan. I still don't understand how that amount was calculated (and no one seems to have clear answers), but it's a bit less than half of my net income from 2019.
Taking out such a large loan was intimidating. I could accept a loan of any amount up to that cap, but after talking with my husband, I decided to take the full amount. With the relatively low interest rate of 3.75% and a 30-year term putting payments at roughly $200 a month, the security of having cash on hand was appealing.
An intimidating list of conditions
When I went to sign the closing documents, I was confronted with a long list of things that the loan can't be used for. No buying new equipment or giving owner bonuses … fair enough. But could I use the loan to pay myself as the owner of the business? The SBA says the funds can be used for payroll, so that seemed OK, although the guidance isn't designed for sole proprietors like me.
The lack of clear-cut guidance — particularly for the self-employed — was frustrating. If you misuse the funds, I read in the disclosure, 1.5 times the amount borrowed can come due immediately, or you can face legal charges. I like to do everything by the book, so not having a book to follow was stressful.
Searching for a clearly acceptable use of the funds, I stumbled upon IRS payments. Although the EIDL loan can't be used to refinance debt or repay federal debt, there's an exception for tax debt. As a self-employed person, taxes take up about 13% of my gross income every year. Being able to use the funds for taxes would free up other money that didn't have restrictions.
Making a tax plan
Before getting the EIDL loan, I had about $6,000 saved for quarterly tax payments, which were due on July 15 for the first half of the year. Knowing that I could use the EIDL funds for taxes, I was able to withdraw that $6,000 and use it to pay other debt, like credit card debt that I'd taken on earlier in the year when my cash flow was limited. This may seem like splitting hairs, but I had peace of mind knowing that I could show that the SBA funds were sent directly to the IRS, freeing up my personal savings.
In addition to quarterly tax payments, I had an $8,000 tax bill from 2019 hanging over my head. Because my business expanded in 2019, my quarterly taxes hadn't covered the amount I owed, so I was left with a hefty bill. Before getting the EIDL loan, I planned to put the tax debt on an IRS payment plan, which generally has a higher interest rate than the EIDL loan.
On July 15 — the tax deadline for 2020 — I'll pay roughly $14,000 in taxes, for 2019 and the first half of 2020. By the end of 2020, I'll have paid at least another $6,000 in taxes. That means half of my loan will be used for tax purposes this year alone.
While it might seem silly to borrow money from the federal government to pay the federal government, the EIDL loan is freeing up cash flow that would otherwise be saved for taxes, at a time when business is unpredictable and having cash on hand gives me important security.
I'm not sure yet what I'll do with the rest of the money — I'm hoping the SBA releases more guidelines with self-employed people in mind. For now, I'm happy to pay interest for peace of mind while I determine how best to use the funds after taxes are paid.
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