EIDL Emergency Advances - Are They Taxable?
Question
“I have an S corporation with eight employees. I applied for and got an Economic Injury Disaster Loan (EIDL) advance of $8,000 from the Small Business Administration (SBA). I didn’t get a Paycheck Protection Program (PPP) loan.
Is this taxable? Does this impact my tax deductions?”
Answer
We don’t have any official guidance on these issues related to the EIDL advance payment.
But we’ll give you our opinion based on what we see in the law.
EIDL Advice
The CARES Act allowed the SBA to provide up to $10,000 as an emergency advance that you don’t have to pay back to the government, regardless of whether you get or reject an EIDL. You apply for the EIDL emergency advance when you apply for an EIDL.
The SBA decided to limit the EIDL emergency advance to $1,000 per employee, up to a maximum of $10,000.1
Income
You have income for federal tax purposes if you have an undeniable accession to wealth (which you clearly realized with the EIDL emergency advance) and over which you have complete dominion (it’s your money).
Since there is no obligation to repay your EIDL advance, it generally is taxable income to you.
But there is an administrative exception, called the general welfare exception, which allows you to exclude from your taxable income some payments made by governmental units under a social benefit program.3
The IRS usually makes determinations on specific types of general welfare payments in a revenue ruling. And here’s good news. The IRS has consistently held that payments made to taxpayers due to disasters fall under the general welfare exception and aren’t taxable.4
Because the COVID-19 pandemic is a nationally declared disaster, it’s likely the general welfare exception will come into play and make the EIDL advance not taxable to you.
Of course, we would like the IRS to put its official stamp on a general welfare exception to the EIDL advance. And we would like this specific guidance soon.
Deductions
In Q&A: Are PPP Loan Forgiveness Expenses Deductible?, we explained that the IRS concluded expenses that create PPP loan forgiveness are non-deductible for two reasons:5
The payments are allocable to tax-exempt income, making the expenses paid with the PPP money non-deductible.
Deductions for otherwise deductible payments are non-deductible if you receive a reimbursement for those payments.
If the EIDL advance is taxable, then the above wouldn’t apply, and you would deduct all your otherwise allowable business expenses.
If the EIDL advance is non-taxable (much preferred), we don’t think any of your business expenses paid with the EIDL advance money become non-deductible under the PPP loan forgiveness guidance because:
1. You don’t need to pay specific expenses to get an EIDL advance, unlike PPP loan forgiveness, which is tied to payment of business expenses with a specific formula.
2. There is no requirement to use the EIDL advance for deductible business expenses; for example, the CARES Act allows you to use the EIDL advance to repay obligations you cannot otherwise pay due to revenue losses.
Once again, we hope the IRS will provide specific guidance on this soon.
Takeaways
Millions of small-business owners like yourself have received up to $10,000 in EIDL emergency advance funds that they don’t have to repay.
Here are our thoughts on the EIDL emergency advance tax treatment:
· EIDL advances are likely non-taxable to you under the general welfare exception.
· You likely don’t have to reduce your deductible business expenses by the EIDL advance amount.
Just to reiterate—the IRS hasn’t given us any official guidance on the tax impacts of the EIDL advance. Let’s hope the IRS does that sooner rather than later.