Your small business has plenty to manage when tax time arrives each year. It can quickly become overwhelming to track down all your business expenses and verify what you can and cannot deduct. Receiving a business grant may have seemed like a miracle at the time, but now it raises an important tax-time question: Do you have to pay taxes on grants?
Your tax burden will depend on the type of small business you have, whether it’s a corporation or a pass-through entity, and whether you were required to pay estimated quarterly taxes. All of these considerations exist on top of trying to stay afloat and manage your day-to-day operations. Calculating whether that grant needs to be counted as taxable income, and how to count it, is one more April headache small business owners face.
There may be other implications around grants that you need to incorporate into your tax planning strategy as well. This guide will walk you through what business grants are and whether they are taxable income, and it will touch on types of grants and tips for doing your taxes if you have received one.
What Is a Business Grant?
- The Small Business Administration (SBA) provides grant funding to some community organizations, including grants for research and development and exporting.
- Grants differ from business loans because they don’t usually have to be repaid as long as certain requirements are met by the receiving business.
- Most funding organizations have specific requirements for the kinds of business they want to fund, so some small businesses or startups may not qualify.
- Government grants may be given on a federal, state, or local level, so your location will play a role in what you qualify for as well.
Are Business Grants Taxable Income?
Business grants can significantly help small businesses stay afloat, and the benefit of not having to pay back the funds makes them much more desirable than business loans. Small businesses may still have to pay income taxes on the grant money, though. Here are a few important points to know:
1. Most Grants Are Taxable
2. COVID-19 Relief Grants
3. Grants That Are Not Taxable
4. Forgiven PPP Loans
It is also helpful to note how Payment Protection Program (PPP) loans are treated. Even though the PPP is a loan program, these loans can be forgiven in full if a business follows all requirements. If the loan is forgiven, that amount is not taxable on a federal level. However, many states still tax those funds as income, so make sure you know your state’s laws.
4 Tips for Handling Business Grant Taxes
1. Save for Taxes
2. Include Grants in Estimated Quarterly Taxes
3. Review All Grant Terms
4. Understand Federal and Local Laws
Get Help Properly Filing Business Taxes
Doing your small business taxes may seem overwhelming, especially after a year like 2020. A tax professional will help you make sense of it all when you have tax questions related to your small business’s obligations, including requirements for reporting grant income.
The Silver Tax Group team is made up of tax lawyers and experts delivering emergency tax services, accounting and consulting, tax debt resolution, business tax filing, IRS audit defense, and much more. We can help you understand whether your business grant can be deducted from your income or not and offer additional guidance for preparing for taxes every year.
Reach out to Silver Tax Group to speak to a tax expert about business grants.