Most business grants are regarded as taxable income, though there are some exceptions. If you are unsure whether your business grant is taxable, you should check the grant agreement, the IRS guidelines, or contact your grant donor.
For most businesses, it makes sense to reserve part of a business grant for tax purposes. Rather than spending all of the grant, you should hold on to part of it in order to meet your tax liabilities.
- Most business grants are taxable, with only a few exceptions.
- Your business grant agreement will state whether your business grant is tax-exempt; if it doesn’t, it’s best to assume that you’ll have to pay tax on the grant.
- If you’re still unsure, you can check with your grant organization or a tax professional.
- It’s best to reserve a portion of your business grant when you first receive it in order to meet your tax obligations.
Are Business Grants Taxable?
The majority of business grants, including government grants, count as taxable income. This means that you’ll have to pay taxes on the money you receive from the grant, effectively reducing the total amount of grant that you receive.
There are some important exceptions to this rule, however:
- Nonprofit organizations with 501(c)(3) status are generally tax exempt, so they don’t pay tax on their income whether this comes from a business grant or another source.
- Most of the business grants that were given out as part of the federal government’s Covid-19 relief program were tax-exempt.
- Grants received by a tribe member from a federally recognized Indian tribe are also tax-exempt.
How to Determine If Business Grants Are Taxable
It’s important to ascertain whether a business grant is taxable before you use it, because if you have to pay taxes this essentially reduces the total amount of the award. It’s best to assume that a grant is taxable, but you can then check a number of sources for information to the contrary.
1. Check the Grant Agreement
Your business grant agreement will outline the terms under which you are given the grant, and will state whether it is tax exempt. If the grant agreement doesn’t state this, it’s best to assume that you have to pay tax on it.
2. Contact the Funding Organization
The funding organization who gave you the grant should know whether it is tax exempt. If your grant agreement doesn’t explicitly mention your tax liabilities, you should call your funding organization to check this.
3. Review Federal and State Guidelines
You can also consult the official IRS guidelines on taxable and non-taxable income. The IRS website contains a comprehensive list of what is considered taxable, and can help you to determine your tax obligations.
You should also check your state’s guidelines on taxable and non-taxable income, because these can differ from the federal government’s rules.
4. Consult with a Tax Professional
If you are still unsure about your tax liabilities, or whether your business grant is taxable, you can seek professional help. If you don’t have a business accountant, you can find certified accountants through a number of websites: CPAVerify, the Association of International Certified Public Accountants (AICPA), or the National Association of Enrolled Agents (NAEA).
Financial Preparations for Taxable Grants
In the majority of cases, any business grant you receive will be taxable. It’s wise to keep this in mind when you are applying for the grant, and definitely before you spend it. Here are some principles that can make it easier to administer the grant:
- Reserve some of the grant for taxes. You should work out in advance how much of the grant you will have to pay in tax, and then set this amount aside. This will avoid you having to find these funds from elsewhere once you’ve filed your taxes.
- Include grants in your accounts. Any grants you receive should appear on your tax return. If you exclude them, you may have to pay penalties.
- Keep good financial records. You should make sure that your business records are accurate, up-to-date, and include any grants you’ve received, whether they are taxable or not.
- Research tax deductions. It may be possible to lower the amount of tax your business pays by taking advantage of tax deductions. This can free up more of the money you’ve received in your business grant.
Finding and Applying for Business Grants
There are many organizations that give out business grants, and it can take a significant amount of research to find a grant that your business is eligible for. You should check:
- Government grants are offered by both the federal and state governments. Grants.gov is a website with a comprehensive list of federal business grants, and the website of the Small Business Administration (SBA) is also a good resource here.
- Corporations also give out grants, often to businesses operating in a particular sector. Finding these grants is most often a case of searching online for a grant that is available to your kind of business.
- Charities and foundations also give out grants, particularly to businesses owned by under-represented communities.
Once you’ve found a suitable grant, you can generally apply online for it. You’ll likely have to include some documents to support your application, including a business plan that explains how the grant will help your business to develop.
Once you’ve applied, it’s a case of waiting. Sometimes, it can take months for a donor organization to make a decision on a grant application, and you might have to call them for an update on your application.
Is Grant Money Taxable Income to a Business?
Generally, yes. The IRS regards most types of business grants as taxable income, with only a few exceptions.
How Are Cash Grants Taxed?
Cash grants are taxed in the same way as non-cash grants. If your business deals in cash, you should be careful to ensure that your records are accurate, because otherwise you could be hit with tax penalties.
Are Grants Reported to the IRS?
You need to report any business grant you receive to the IRS as part of your tax return. Failure to do this is considered tax fraud, and could have serious consequences.
The Bottom Line
Most business grants are taxable, with only a few exceptions. Your business grant agreement will state whether your business grant is tax-exempt; if it doesn’t, it’s best to assume that you’ll have to pay tax on the grant. If you’re still unsure, you can check with your grant organization or a tax professional. It’s best to reserve a portion of your business grant when you first receive it in order to meet your tax obligations.