SBA EIDLs can be a great source of low-interest funding for businesses struggling with the economic impact of the COVID-19 pandemic.
Unlike PPPs, EIDLs are not forgivable—borrowers have to pay them back. But they have a low 3.75 percent interest rate and a long 30-year repayment period. Borrowers can repay them at any time without penalty.
To obtain an EIDL, borrowers must sign a loan authorization and agreement, a note, and a security agreement filled with fine print. Many of these provisions could have a significant impact on the borrower’s business for the life of the loan—up to 30 years.
It is vital to understand the terms and conditions before taking out any loan, including an EIDL. Here are seven key provisions borrowers should be aware of.
1. No Changes to the Business
Without SBA approval, EIDL borrowers may not sell the business or change its ownership structure. This includes removing or adding a business partner.
2. No Distributions outside the Usual Course of Business
The owners may not make distributions outside the usual course of business without SBA approval. This includes loans, advances, bonuses, or asset transfers to owners, employees, or other companies.
Distributions within the usual course of business are permitted. SBA officials have said this includes distributions of net income to owners of a pass-through business, such as an S corporation or a limited liability company.
3. Strict Record-Keeping Requirements
The SBA imposes strict record-keeping requirements on EIDL borrowers. They must keep itemized receipts showing how they spend the loan funds. Also required is a full set of financial and operating statements, which must be furnished to the SBA each year. The SBA also has the option of requiring an expensive review of the borrower’s records by an independent CPA.
4. Using Other COVID-19 Payments to Pay the SBA
EIDLs are intended to cover disaster losses not compensated by other sources. If an EIDL borrower obtains grants, loans, insurance proceeds, or lawsuit recoveries to help defray COVID-19-related losses, the borrower is required to notify the SBA. The SBA may require that such money be used to repay the EIDL.
But a business may obtain both a PPP loan and an EIDL so long as it doesn’t use them for the same expenses.
5. Strict Collateral Requirements
Businesses that borrow more than $25,000 are required to pledge all their business’s personal property as collateral. Such collateral includes present and future inventory, equipment, deposit accounts, promissory notes, negotiable instruments, and receivables.
The SBA obtains a security interest in all such collateral the borrower has at the time of the loan, or collateral it acquires or creates in the future. The borrower must
• obtain hazard insurance for its collateral, and
• ask the SBA for permission before selling or otherwise disposing of its collateral, other than selling inventory in the ordinary course of business.
6. Buy American
EIDL borrowers must promise to buy American-made equipment and products with the loan proceeds, to the extent feasible.
7. Penalties for Violations
Penalties for violations of the EIDL terms can be severe. The SBA can demand immediate repayment of the entire loan if the borrower breaches any of its terms. The SBA also reports defaults to credit reporting agencies.
Borrowers who misapply EIDL funds—for example, using them to pay personal expenses—are liable to the SBA for an amount equal to one-and-a-half times the original loan.
What is the unpardonable sin in an IRS audit?
Suppose you just received a letter from the IRS telling you that you are the subject of an IRS audit. What one record receives special attention? What one record can create a nightmare for you? What one record makes the IRS suspect that you are the keeper of lousy records?
Think of the record you most hate keeping. That’s the one we are talking about. You have probably guessed what that record might be.
Red-Flag Record for the IRS Examiner
Once your audit examination begins, the examiner likes to see this record. If the record is missing or lacking, the IRS examiner knows that your other records probably are lacking, too. This record—the one you probably hate keeping—is the mileage log on your vehicle or vehicles.
The IRS notes that a taxpayer’s failure to keep a mileage log on vehicles indicates that the activity under examination is not being conducted in a businesslike manner.
Do as the Tax Form Says
As a one-owner or husband-and-wife-owned business, regardless of whether it’s a corporation, a partnership, or a proprietorship, you file a tax form that asks you for the following information about your vehicles:
1. Do you have evidence to support the business/investment use claimed? (If “yes,” is the evidence written?)
2. List your total business/investment miles on each vehicle.
3. List your total commuting miles on each vehicle.
4. List your total personal miles on each vehicle.
IRS Form 4562 has columns for answers to the above questions for up to six vehicles used by either a sole proprietor or an owner of more than 5 percent of a corporation, a partnership, or another entity. The mileage log is the record of proof that you need to use for your answers to the tax form questions.
Do What the Audit Would Require
Above, we said to do as the IRS form says. For additional clarification, it is good to know what information the IRS, in a correspondence audit, requires you to provide related to that tax form:
1. Send copies of repair receipts, inspection slips, and other records showing total mileage for the year.
2. Send copies of logbooks and other records to support the business mileage claimed.
3. Provide a copy of your appointment book or calendar of business activities for the year.
4. If you are claiming actual expenses, provide copies of paid bills, invoices, and canceled checks for automobile expenses. These would include gas, oil, tires, repairs, insurance, interest, tags, taxes, parking fees, and tolls.
5. Send a copy of the bill of sale or other verification to establish your basis in the vehicle, including the trade-in of another vehicle.
Note that the IRS is looking for
• a match of the repair bill odometer reading with the mileage in your logbook;
• a match of the inspection slip odometer reading with the mileage in your logbook;
• the mileage between repair stops, to see whether that ties in with your claimed mileage; and
• a business purpose that ties in with your appointment book or other calendar of business activities.
If you want to avoid big trouble during an IRS audit, keep a good mileage log. This takes just minutes a day.
The mileage log is often one of the first records that an IRS examiner will look at. A good mileage log shows that you know the rules and you respect them. Many IRS audits end favorably and quickly upon presentation of a good mileage log.
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