Great news you received the EIDL funds (Economic Injury Disaster Loan)!  The big question now is what can you use the money for?

After reading though the SBA SOP 50 EIDL, it is not surprising that there are so many questions as to what you can spend the money on!

The guidance from the SBA is specific and vague all at the same time and as a business owner how do you comply with rules that are clear as mud?

The first thing to understand is that EIDL is meant to provide relief for disaster induced economic injury and is not meant to help a business expand, relocate, or become profitable.

The following paragraph from the SBA SOP 50 39 is probably the clearest definition you will find in the document:

“Economic injury may be reduced working capital, increased expenses, cash shortage due to frozen inventory or receivables, accelerated debt, etc. Economic injury loan proceeds can only be used for working capital necessary to carry the concern until resumption of normal operations and for expenditures necessary to alleviate the specific economic injury.”

Starting with the definition of working capital it is nothing more than a formula that tells you how much money you have available after you pay all your current liabilities.

Current Assets (cash, Accounts receivable, Inventory) Less Current Liabilities (money you owe to vendors/creditors) = Net working capital

Normally a business should have enough cash and accounts receivable generated from sales to cover vendor bills, operational expenses and to have a reserve to cover dips in cash and to provide for investments in equipment or expansion.

COVID19 has for many businesses consumed all working capital which means they can’t pay for normal operations that occur regardless of sales volume.

For EIDL this means that you can use the loan to cover the lack of working capital so that you can pay your vendors, building rent, purchase supplies, keep fixed debt current and so forth.

The expenditures needed to alleviate the injury is where the fun begins as how do you identify disaster caused injury and determine what is needed to alleviate the injury? For COVID19 the level of impact changes daily as regulations and health department orders are in constant flux.

On page 185 the SOP gives a couple of examples which still leave you wondering what qualifies as this type of expenditure.

What follows are examples of what you can and cannot use EIDL for and is based on best interpretation and general consensus of the SBA guidelines.

  • Can I use EIDL to pay myself? The SOP states payments to owners are not allowed: “Disbursements to owners, partners, officers, directors, or stockholders, except when directly related to performance of services for the benefit of the applicant.”
    • As a business owner whether you receive a paycheck or take an owner draw, you can pay yourself if the payment is based upon services/work you have provided to the company. Spending time on website upgrades, marketing plans, social media content, etc. are all considering working in your business and therefore eligible to be paid for services rendered
    • Owners cannot use EIDL to pay dividends or bonuses to themselves, but funds can be used to pay employees a bonus.
  • Can I pay off my credit card debt?
    • The SOP is clear that funds cannot be used to pay off long term debt or to repay owner loans.
    • You can use the funds to maintain fixed debts as current, but not to pay off the debt in a lump sum.
    • Credit cards are short term debt and consensus is that is ok to use for BUT only for business related credit card debt
  • Can I use to purchase a new company vehicle? No as the purchase of assets are not allowed
    • You can use to purchase equipment that is necessary for the continued operations if doesn’t qualify as an asset based on your company’s established asset policy
  • Can I use to cover my rent or mortgage? Depends
    • If you own a commercial building that is the business location, then yes
    • If you have a home office that is normally expensed using the home office deduction, then no.
    • If you pay rent to a landlord and have a lease agreement, then yes.
  • Can I used EIDL to pay utilities? The answer is similar the rent question
    • If you have a home-based business and business practice has been for the company to pay the internet bill as is needed to operate then probably yes.
    • Lights/Gas/Trash that is part of utilities that is both personal and business and/or part of home office deduction then no.
    • If you have commercial space that is leased or owned, then yes
  • Relocate to an area outside of the disaster area that your EIDL is based on? No
  • What records do I need to keep and how?
    • You don’t need to have a separate bank account for EIDL funds
    • You do need to track what expenses are being paid for with EIDL
    • An excel spreadsheet will work just fine
    • Keep all receipts in a folder specific to EIDL for a minimum of three years from receipt of funds
  • Is there a deadline on when I must use all the money? Typically, the answer is when the disaster is over and there is no longer any economic injury.  In the current COVID19 environment this is impossible to predict or know with certainty.  If your state removes all restrictions to operating, then at that point the COVID19 disaster would be considered over.  In a state where the restrictions are removed, reduced, or even added back it will be much harder to know what the actual disaster is over.

All the above is based on best interpretations and if in doubt reach out to your tax CPA or schedule an appointment with Beyond Accounting to find out what is the best answer specific to your situation.

Fingers crossed that there are no more surprises for 2020!

Beyond Accounting helps companies who are struggling to make sense of what their numbers are telling them.  At Beyond Accounting we help by giving you a clear picture of your finances and help you develop processes to streamline your entire business.  So, you can be confident in your decisions and your business’s future.  Schedule and free consultation today.