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 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
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.