Are EIDL loans taxable?


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Should you expect to be taxed on emergency help? The SBA’s Economic Injury Disaster Loan (EIDL) program has historically been reserved for businesses impacted by declared disasters throughout the U.S. But in 2020, the program was expanded with a separate COVID-19 EIDL for businesses nationwide. While the additional financing has helped keep many businesses afloat, it’s still important to understand the tax implications that come with EIDL program loans and other COVID-19 relief programs.


Related: How much does a small business pay in taxes?


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Which COVID-19 related government grants and loans are taxable?

Many businesses have received federal relief grants and loans since the onset of the COVID-19 pandemic. Here’s how each one is handled when it comes to federal taxation.


Unlike some other relief programs, the COVID-19 Economic Impact Disaster Loan (EIDL)  program is not forgivable. That means all borrowers must repay the principal and interest in full. Since the EIDL is a repayable loan, it is not considered income, so it is not taxable. Typically, you can use the interest you pay on the loan as a business tax deduction. The same rule applies to non-COVID EIDLs for businesses in declared disaster areas. So if you’re battling COVID challenges as well as the aftermath of a hurricane, for instance, the tax treatment will be the same for more than one EIDL

EIDL advances

The EIDL Advances are grants, and several have been issued. Currently, the Targeted EIDL Advance and the Supplemental Targeted EIDL Advance are available through December 31, 2021. The Advances are forgivable—they don’t need to be repaid.


EIDL Advances were designed to give small businesses immediate financial relief at the start of the pandemic and have now closed. However, Targeted Advances and Supplemental Targeted Advances, which are meant for businesses in low-income areas, are still available through the end of 2021. Eligible businesses could receive up to a total of $15,000 between the two Targeted Advances.


Originally, Advance funds were supposed to be taxed, but the Consolidated Appropriations Act, enacted in December 2020, reversed this decision. Now, business owners do not have to report these forgivable funds as taxable income.

Paycheck Protection Program

The Paycheck Protection Program (PPP) gave businesses forgivable loans when the funds were used for qualifying expenses, including payroll. Applications for forgiveness are due 10 months after the covered period. But regardless of whether or not the funds end up being forgiven, PPP loans are not taxable. Additionally, expenses that were paid with PPP funds may still be claimed as tax deductions.

State taxation of PPP loan funds

While the federal government has ruled not to tax PPP funds, some states have opted to collect tax on forgiven funds. As of July 2021, the following states plan to tax some or all of a business’s forgiven PPP funds. This list also includes states that may only tax certain types of businesses. Check your state’s revenue department for more details on what to expect.


States Taxing Forgiven PPP Funds:

  • California
  • Florida
  • Nevada
  • North Carolina
  • Ohio
  • Rhode Island
  • Texas
  • Utah
  • Virginia
  • Washington

There are also state-by-state variations on whether or not expenses paid with forgiven PPP funds may be used as a tax deduction.  Your CPA should also keep you updated on what to expect in terms of state taxation related to COVID relief measures.

Do I need to worry about being audited if I received an EIDL or PPP loan?

These special SBA loan programs come with different audit standards than typical online loans for small businesses. In most cases, the potential for audit depends on the size of the loan. There is no set audit trigger for COVID-19 EIDLs, but the SBA does reserve the right to audit businesses to confirm their eligibility. For PPP loans, any business that received loan funds of $2 million or more will be subject to an audit by the SBA. Businesses with PPP loans that don’t reach that threshold are protected from audits under a safe harbor. The SBA audit is not a tax audit, but an eligibility audit for loan fund eligibility and forgiveness. Businesses must show the following:

  • They’re eligible to apply for PPP funds.
  • They’ve calculated the correct loan amount.
  • Loan funds were used on eligible expenses.
  • They’re qualified for loan forgiveness.

When applying for forgiveness, businesses must submit the Loan Necessity Questionnaire, along with supporting documentation.

SBA audit tips

Follow these tips to ensure a smooth audit process if (or when, depending on your loan size) the time comes.

  • Be Prepared. Stay organized with your bookkeeping and loan documentation right from the beginning, especially if you know your loan size is large enough to trigger an SBA audit. You’ll save a lot of time and headache if you prepare your finances in real-time.
  • Gather Your Documentation. Keep track of any documents related to proving your eligibility for the PPP or EIDL funds. Track expense receipts and payroll documents to demonstrate that PPP funds were spent on eligible expenses. Also, keep copies of financial statements and profit-and-loss statements to show that the business meets the lost revenue requirements. Keep all of these records for at least six years after repaying the loan or getting it forgiven.
  • Get Professional Help. It can be difficult to keep track of the SBA and IRA requirements, as well as potential interpretations of some of their rulings. Consider hiring an accountant who regularly tracks what’s happening with EIDL and PPP audits. They’ll share that experience with you to make sure you’re keeping the right records and that everything is accurately submitted when the audit begins.

The takeaway

Taking out an EIDL can impact your taxes in several ways, both positive and negative. EIDL funds are typically not taxed at the federal level. But it’s important to monitor your state’s ruling on how it treats forgiven funds in terms of both taxation and expense deductions.


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Private vs. federal student loans


Getting accepted to college may seem exciting on the surface, but in reality, it’s only half the battle. After you’ve filled out your applications and decided on a school, you’ll then need to fund your college education (which can quickly dampen the excitement of getting accepted).


There are a few different options when it comes to financing a college education, and it’s important to understand the pros and cons of each. Then, you’ll likely be better able to develop a funding strategy that fits your unique situation.


Depending on your academic qualifications, you may have been awarded scholarships or grants, which is funding that won’t (typically) need to be repaid. Any expenses not covered by a scholarship will need to be financed, often through a combination of work-study, personal funds, or student loans.


It is fairly common for college students to take out student loans to finance their education. There are two main types of student loans: private student loans and federal ones.


We’ll compare and contrast some of the more popular features of both private and federal student loans and explore some features that can help you determine what makes the most sense for your financial situation.


Related: A guide to private student loans


Damir Khabirov / istockphoto


Federal student loans are funded by the federal government and, in order to qualify, you must fill out the Free Application for Federal Student Aid (FAFSA) every year that you want to receive federal student loans. We’ll delve more into FAFSA soon — but first, here are some important distinct

ions to consider.


Ta Nu/ istockphoto


Federal loans can be subsidized or unsubsidized. If you’re an undergraduate student and you have a certain level of financial need, you may qualify for a subsidized loan. The amount of money you qualify for will be determined by your school. They’ll also determine how much money you should receive in subsidized loans, if any.


If you are granted a subsidized loan, the U.S. government will cover, or subsidize, the cost of accrued interest on the loan  while you are a full- or half-time student.


Your interest payments are also covered with subsidized loans during the six-month grace period after graduation as well as during any periods of loan deferment.


If you receive unsubsidized federal loans, you will not need to demonstrate financial need when applying and, as with subsidized loans, your school will determine the amount you can receive, based on what it will cost you to attend.


But with unsubsidized loans, you are responsible for the principal amount of the loan as well as any interest that accrues throughout the life of the loan.


Direct PLUS Loans are another source of federal student loan funding. To qualify for graduate PLUS Loans, you need to be a graduate-level or professional student in a program that offers graduate or professional degrees or certifications and be attending college at least half-time.


Or parents can also apply for a parent PLUS loan  if they’re the parent of a dependent undergraduate student attending an eligible school at least half-time. “Parent” can be defined as biological or adoptive — or, under certain circumstances, you can be a step-parent.


To obtain a Direct PLUS loan, you cannot have an adverse credit history (you can learn more about that here). Plus, you (and, if applicable, your dependent child) must meet the general eligibility requirements for federal student aid.



simonapilolla / istockphoto


If you plan to apply for any of these types of federal loans, you’ll need to fill out the FAFSA form. Be aware of your state’s deadline — FAFSA funding is determined on a rolling basis, so the sooner you can apply, the sooner you may qualify.


Photobuay / istockphoto


First off, you won’t be responsible for making student loan payments while you are actively enrolled in school. Your repayment will typically begin after you graduate, leave school, or are enrolled less than half-time. Interest rates on federal student loans made after July 1, 2006  are fixed and are typically lower than interest rates on private student loans.


And depending on the type of federal loans you have, the interest you pay could be tax deductible. Aside from Direct PLUS Loans,credit history doesn’t factor into a federal loan application. When it comes to federal student loan repayment, there are several options to choose from, including several income-driven repayment plans.


And if you run into difficulty repaying your federal student loans after graduation or when you drop below half-time enrollment, there are deferment and forbearance options available.


These programs allow qualifying borrowers to temporarily pause payments on their loans should they run into financial issues, but interest may still accrue. The loan type will inform whether a borrower qualifies for deferment or forbearance.


Borrowers can contact their student loan servicer for more information on these programs.


Qualifying borrowers can also enroll in certain forgiveness programs, such as Public Service Loan Forgiveness (PSLF). These programs have strict requirements, so borrowers who are pursuing forgiveness should review program details closely.


The CARES Act, passed in March 2020 in response to COVID-19, includes provisions to help borrowers with federal student loan repayment. The bill temporarily pauses payments on most federal student loans, without interest, through the end of September 2021.


Additionally, the CARES Act suspends involuntary collections and negative credit reporting during the same time period.


While required payments are paused, borrowers are still able to make payments on their loans if they so choose. 100% of payments made during this time will be applied to the principal balance of the loan.


Borrowers enrolled in forgiveness programs will not be impacted by the nonpayment of their loans during this time. The Education Department will consider this time period as if the borrower had continued making payments.


Feverpitched/ istockphoto


Private student loans are not funded by the government. To apply for them, you can check with individual lenders (banks, credit unions, and the like), with the college or university you’ll be attending, or state loan agencies.


Because these loans are available from multiple sources, and each will come with its own terms and conditions. So, when applying for private student loans, it’s important to clearly understand annual percentage rates (APRs) and repayment terms before signing as well as the differences between private vs federal student loans.


Since private student loans are not associated with the federal government, their repayment terms and benefits vary from lender to lender. Some private loans require payments while you’re still attending college.


Unlike federal loans, interest rates could be fixed or variable. If you are applying for a variable-rate loan, it’s a good idea to check to see how often the interest rate can change, plus how much it can change each time, and what the maximum interest rate can be.


When applying for a private loan, the lender typically reviews your financial history and credit score, which means it may be beneficial to have a cosigner.

Again, be sure to ask your lender about repayment options in addition to any deferment or forbearance options.


These will all vary by lender, so it’s important to understand the terms of the particular loan you are applying for.


Private loans can help fill the monetary gap between what you’re able to cover with grants, scholarships, federal loans and the like, and what you owe to attend college. It’s never a bad idea to take the time to do your research, shop around, and find the best loan options for your personal financial situation.


fizkes / istockphoto


To find out if the student loan you have is a federal student loan, one option is to check the National Student Loan Data System (NSLDS).


This database, run by the Department of Education, is a collection of information on student loans, aggregating data from information about student loans, aggregating data from universities, federal loan programs and more.


Borrowers with federal student loans can also log into My Federal Student Aid  to find information about their student loan including the federal loan servicer.


Private student loans are administered by private companies. To confirm information on a private student loan, one option is to look at your loan statements and contact your loan servicer.


grinvalds/ istockphoto


After graduation, depending on one’s student loan situation, borrowers may wish to consider consolidation or refinancing options to combine their various loans into a single loan.


The federal government offers the Direct Consolidation Loan program that allows borrowers to combine all of their federal loans into one consolidated loan.


Loans consolidated in this program receive a new interest rate that is the weighted average of the interest rates of all loans being consolidated — rounded up to the nearest one-eighth of a percent.


This means that the actual interest rate isn’t necessarily reduced when consolidated. If monthly payments are reduced, it is most likely because the repayment term has been lengthened.


Additionally, only federal student loans are eligible for consolidation in the Direct Consolidation Loan program.


Youngoldman / istockphoto


Borrowers with private student loans might consider refinancing their loans. Essentially, refinancing is taking out a new loan. Depending upon individual financial situations, applicants could qualify for a lower interest rate through refinancing.


When an individual applies to refinance with a private lender, there is typically a credit check of some kind. Each lender reviews specific borrower criteria, which varies from lender to lender, which influences the rate and terms an applicant may qualify for.


But what if you have both federal and private loans? If you combine your federal loans through the Direct Consolidation Loan program and refinanced your private loans, you’d still have two payments.


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