Are Business Grants Taxable Income? What You Should Know

Published By: Chad Silver
On: March 30, 2021
Last Updated: December 5, 2022

See More in: Business Tax

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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?

Business grants are meant to help with a variety of expenses. They are typically given by government entities or foundations, but may also be granted by corporations or trusts. Here’s what to keep in mind:

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.

Organizations that offer grants often have stringent reporting requirements to make sure you live up to the terms of the funding. If you received a grant to achieve a specific goal, such as installing solar panels, make sure you can follow through on that goal and meet the organization’s reporting requirements.

Are SBA Loans taxable income?

Many types of SBA loan programs, such as the SBA 7(a) Loans, Microloan Programs and Disaster Assistance Loan Programs, are not considered taxable income. It is important to note that if you meet certain IRS requirements, you may also deduct loan interest paid, as well as other qualifying business expenses on your tax returns.

Before filing end-of-year taxes or applying for an SBA loan or SBA grant, it’s important to consult with an accountant or tax attorney to determine if the loan or grant will be considered taxable income. By being aware of the tax implications ahead of time, you can avoid any surprises down the road.

Are SBA grants taxable income?

Yes, SBA Grants are taxable income. However, there is one exception. If a grant is made by the government of a federally recognized Indian tribe to a member to expand an Indian-owned business on or near reservations, then that money is not taxed.

So, if you receive an SBA grant, you will need to report the grant as income on your tax return. The amount of the grant that is considered taxable income will depend on your marginal tax rate. For example, if you are in the 25% marginal tax bracket, then 25% of the grant will be considered taxable income.

It is also important to note that SBA grants may be subject to state and local taxes. For example, in New York City, all grants are subject to a 4% “unincorporated business tax.” As always, we recommend speaking with a qualified tax professional to determine how your specific grant will be taxed.

Are State Grants Taxable Income?

Yes, the IRS classifies state grants as taxable income, which means that businesses and non-profit organizations must report them on their taxes. While some grants may be exempt from taxes, most are not. It is important to know the difference so that you can correctly file your taxes and avoid penalties.

The good news is that there is a way to minimize the tax liability associated with state grants.

The first step is to determine how much of the grant money will be used for taxable expenses. This can include things like salaries, rent, or advertising. Once you have determined what portion of the grant will be used for taxable expenses, you can then deduct that amount from your total income. This will help to reduce your overall tax liability.

It is also important to keep in mind that some states may require businesses or non-profit organizations to pay taxes on state grants received. Be sure to check with your state’s tax laws before filing your taxes so that you are aware of any additional taxes that may be due.

Do You Issue A 1099 For Grants?

Yes, if the grant is for $600 or more. You will need to fill out a 1099-MISC form and send it to the recipient by January 31st of the year following the year in which the grant was received.

Why You Should Issue A 1099 For Grants

There are a few reasons why it’s important to issue a 1099 for grants. First, it allows the IRS to track the money that is being spent by companies who receive grants. Second, it ensures that companies who receive grants pay taxes on that income. And third, it creates a paper trail which can be helpful if there are ever any questions about the grant or how it was used.

How To Issue A 1099 For Grants

The process for issuing a 1099 for grants is actually quite simple. First, you’ll need to obtain a copy of the 1099-MISC form from the IRS website. Next, you’ll need to fill out the form with your company’s information and the recipient’s information. Finally, you’ll need to send the form to the recipient by January 31st of the year following the year in which the grant was received.

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

Business grants are usually considered taxable income. There are a few exceptions, but each grant will have its own set of requirements. Always make sure to read through the grant agreement or ask the funding organization for specifics. Research your local laws and federal requirements for the type of grant and whether or not it is taxable. You will also not be able to deduct taxable grants from your business income.

2. COVID-19 Relief Grants

You may have more questions than normal because of the different forms of governmental relief brought by the COVID-19 pandemic. The Coronavirus Relief Fund was created as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which set aside funds for governments to cover public health emergency costs and community support. CARES Act funds are generally taxable grants, as are grant programs created by your local government to support businesses.

3. Grants That Are Not Taxable

There are some exceptions. CARES Act grants given to an Indian tribe or Indian-owned business are not taxable, and many grants for veterans are nontaxable. Some government grants used by businesses to pay utilities or mortgage expenses may also be deducted from income.

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.

A tax professional can help you figure out whether your specific grant should be included as taxable income or not, but you should be ready to cover the taxes on grants you received during the year. That shouldn’t prevent you from doing everything you can to reduce your tax overall burden, though.

4 Tips for Handling Business Grant Taxes

Your business should follow all laws and terms when it’s been awarded a grant. Requirements may differ based on location, business type, or funding organization, so always make sure you understand what is required to comply. Here are a few other tips for preparing your taxes if you have received a business grant.

1. Save for Taxes

Set aside money to cover the taxes before you spend the money. Preparing to cover the taxes up front will prevent surprises at tax time. Be sure to plan for a higher tax bill the following year if you can’t set the tax money aside when you receive the funds.

2. Include Grants in Estimated Quarterly Taxes

Remember to include grant funds in quarterly tax payments if your business is required to make them. This is another way to make sure you aren’t hit with a surprisingly high tax bill the following year.

3. Review All Grant Terms

It may seem obvious that you need to carefully review your grant agreement. Many businesses get caught up in using the funds and don’t give the terms their full attention. Make sure you understand all your obligations for the grant.

4. Understand Federal and Local Laws

There are federal, state, and local laws to know regarding tax reporting related to grants. Always be diligent to ensure compliance with these rules so you aren’t faced with an unexpected tax bill or penalty for a misstep.

Calculating these obligations can quickly become confusing, especially if you’re dealing with other COVID-19-related challenges. It is a good idea to speak with a business tax expert to make sure you understand all the requirements for filing.

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.