Self-employed people and independent business owners facing financial hardship due to the coronavirus (COVID-19) have the option to apply for an Economic Disaster Loan (EIDL) – a low-interest federal disaster loan that is directly administered by the Small Business Administration (SBA). Find out if you qualify for this loan and how receiving one can affect your taxes.
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Who is eligible for an economic disaster loan?
Small business owners, private nonprofit organizations, and farm businesses with fewer than 500 employees in all U.S. states and territories that meet certain criteria may be eligible for an Economic Disaster Loan (EIDL).
The purpose of these loans is to help businesses meet their financial obligations that would not have required assistance if the disaster had not occurred.
To be considered, you generally need to fall into one of these categories:
- You operate a business under a individual business or as an independent contractor (even without any employee other than you)
- You run a cooperative, an employee share ownership plan (ESOP) or a small tribal business with fewer than 500 employees
- You operate a business, agricultural cooperative, aquaculture business, nursery or producer cooperative with more than 500 employees that is still considered small for your industry under the SBA size standards
- You run a private, non-profit, non-government organization that has obtained a 501 (c), (d), or (e) from the IRS or has proof from your state that you are a non-income generating organization that is either denominational or doing business under state law
You should also be aware that if your business falls into any of the following categories, you may not be eligible for an economic disaster loan:
- You or your business is engaged in an illegal activity at the federal level, such as the sale of cannabis
- You or a principal applicant with at least a 50% interest in your business are more than 60 days behind on child support obligations
- You or your business benefits from activities that are “sexually lascivious”, such as exotic dancing or sex toys
- More than a third of your gross annual income comes from legal gambling
- You are in lobbying
- Your business is a state, local or municipal government entity and / or you are a member of Congress
How can the loan money be used?
The money loaned under an economic disaster loan can be used for the vast majority of normal operating expenses. In addition to the payroll, the money from the economic disaster loan can be used to pay
- health coverage,
- utilities and
- all trade debts that would have been paid had the pandemic not occurred.
Is there something that the loan money cannot be used for?
Loan funds cannot be used for certain items, including:
- Payment of dividends or bonuses
- Disbursed to owners except for services
- Repayment of certain shareholder / principal loans
- Payment for lost sales or profits or business expansion
- Loan payments on other federal debts
- IRS tax penalties
- Long-term debt refinancing
Have there been any changes regarding the type of companies allowed to apply?
The Economic Disaster Lending Program (EIDL) existed before the pandemic, but the Coronavirus Aid, Relief and Economic Security Act (CARES) which went into effect on March 27 expanded the program for business owners affected by COVID-19. For example, traditional EIDLs have not been granted to U.S. farm businesses, but Congress has now allowed these businesses to participate in the program.
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What are the loan conditions and is there a possibility of loan forgiveness?
With terms of up to 30 years, interest rates for economic disaster loans are currently:
- 3.75% for businesses
- 2.75% for associations
There are no penalties or prepayment charges for these loans, but they are not forgivable. In other words, you have to repay the loan. Repayment does not begin until a year after the loan money is disbursed, although interest begins to accrue immediately.
To note: Under the CARES Act, the government previously authorized advances in the form of grants of up to $ 10,000. These advances did not have to be repaid, but they are no longer available (keep an eye out in case they come back).
How Much Money Can I Get From an Economic Disaster Loan?
Loan amounts vary from applicant to applicant and are based on the amount your business has lost due to the emergency. Although loans can be as high as $ 2 million, they were reportedly recently capped at $ 150,000 per applicant.
How do I apply for an economic disaster loan?
the online application is simple and requires basic information about your:
- Gross revenue
- Cost of goods sold in the previous year
You must gather all the relevant tax information and financial statements before completing the application. The IRS will not provide the SBA with any missing information, so you should enter as much as possible as the missing information delays the application process.
Do I have to wait to apply?
No need to wait – requests are processed as they come in, and once the money for this program is gone, you might be out of luck. It doesn’t cost anything to apply, and you don’t have to accept the loan if you are approved, so there really is no harm in applying.
What are the tax implications for small businesses and the self-employed who take out an economic disaster loan?
The bottom line: An economic disaster loan can be the help your business needs right now. With low interest rates and no tax penalties for obtaining the loan, you won’t be putting your business at risk if you decide to take a loan in the event of an economic disaster.
TurboTax is here to help you navigate the various COVID-19 relief programs that you may be eligible for. Get up-to-date information, tax advice and tools to help you understand what coronavirus relief means to you, allowing you to get more cash in your pocket during this time of need at our Coronavirus Relief Center for Self-Employed and Small Businesses.