Business grants can be a game-changer for small business owners seeking financial support. They provide non-repayable funds, offering a much-needed infusion of capital without the burden of repayment, and unlock opportunities for the growth and expansion of your business.
But before you begin applying, it’s important to carefully consider the tax obligations with business grants to avoid unexpected tax liabilities and comply with legal requirements.
We’ll discuss how to determine if you have to pay taxes on grant money and effectively plan for future business income tax payments.
Business grants are usually taxable
In certain instances, your grant may be nontaxable
There are several ways to find out if your grant is taxable
Always maintain good financial records to avoid underpayment penalties or unexpected tax expenses
Are business grants taxable?
If you’re wondering if business grants are taxable, the answer is yes. But it’s important to note not all grants fall under the same tax rules. Certain types of grants are considered nontaxable, depending on their purpose and the specific circumstances.
For example, nonprofit organizations with 501(c)(3) status are typically considered tax-exempt, as well as COVID-19 relief grants and grants received by a tribe member from a federally recognized Indian tribe.
How to know if your business grant is taxable
Determining your tax responsibilities after receiving a business grant makes financial planning easier. Here are several ways to assess whether your grant qualifies as taxable income.
Review your business grant agreement
When confirming what tax obligations you may have, if any, your best bet is to review your business grant agreement. This should have been provided when you received the grant, and it should outline any tax obligations you may have.
Contact the funding organization
You can contact the funding organization if your grant agreement doesn’t explicitly state your tax obligations. They can confirm this information.
Research federal guidelines
To find tax requirements, navigate to the official IRS website. There, you’ll find federal guidelines for taxable and nontaxable income and comprehensive resources to help determine your specific filing obligations.
Review your state’s laws
All states have laws regarding the handling of business income, including business grants. This information can be found on each state’s Department of Revenue website.
Consult with a business accountant or tax professional
A business accountant or tax professional can determine tax obligations associated with your grant and any other tax-related questions you may have. If you don’t already have a business accountant, you can locate certified accountants and other tax professionals through CPAVerify, the Association of International Certified Public Accountants (AICPA) or the National Association of Enrolled Agents (NAEA).
Tips for taxable business grants
Once you’ve confirmed whether or not your business grant is taxable, you want to prepare to pay these taxes.
Here are a few tips to help you handle your tax obligations after receiving a business grant:
Reserve a portion of the grant money for taxes. Rather than spend all the grant funds, reserve a portion to cover the taxes. This can save you from having to scrape together the funds later when it’s time to file.
Don’t exclude grants from estimated taxes. Failing to account for grant income can lead to underpayment penalties, so whenever you pay your estimated taxes, don’t forget to include your grants.
Maintain good financial records. To successfully manage your business finances, you must accurately track your business income, expenses and tax obligations, including taxable and nontaxable business grants.Doing so can prepare you for future audits and avoid any unexpected tax obligations.
Look into tax deductions: A taxable business grant can increase what you owe, but it’s possible to lower your business taxes to a more affordable amount. For example, you can take advantage of deductions, which reduce the total taxable income for your business.
Where to find business grants
Before you can fill out a grant application and receive funds, you have to know where to find business grants, and this requires you to do some research.
Government agencies: Check official government websites such as Grants.gov or the Small Business Administration (SBA) website for various business grants available at the federal, state and local levels.
Corporations: Look into corporations and foundations to see which offer grants to businesses operating in your industry or have specific funding priorities aligned with your business.
Nonprofit organizations: Nonprofit organizations often provide grants to support businesses within certain industries, but may focus on funding businesses operating in underserved communities.
Finding business grants takes some research, but they are available for different groups and businesses, such as:
Alternatives to business grants
In addition to tax liabilities, business grants can also involve longer application processes and may have stricter eligibility criteria, and because the money is free, grants are competitive.
Most grant alternatives require repayment, but they can still get you the funding you need from other sources, such as business loans and credit cards.
SBA loans: If you prefer an option with lower interest rates, longer repayment terms and access to more significant loan amounts, an SBA loan might be the better fit. Even though it needs to be repaid, the lower interest rate makes this option affordable.
Business credit cards: Business credit cards offer flexibility, immediate access to funds up to a certain limit and potential rewards, making them a great alternative financing option for managing day-to-day expenses.
Crowdfunding: Consider using crowdfunding platforms like Kickstarter or Indiegogo to raise funds for your business by presenting your project or idea to a broader audience. Note that these funds may also be taxable since the IRS considers them to be a sale if there’s an exchange of goods or rewards.
The bottom line
Business grants are an opportunity for entrepreneurs to access free money. However, since grants can be subject to taxation, you want to be aware of your obligations so you can properly handle your business finances. And if you are unsure, don’t be afraid to seek professional advice or consider an alternative funding option.
Frequently asked questions
Are all business grants taxable?
Business grants are typically considered taxable income, but there are some exceptions.
How do you know if a business grant is taxable?
You can determine if your business grant is taxable by reviewing the grant agreement or contacting the funding organization. Additionally, you can review state and federal guidelines or speak with a tax professional who can confirm any tax obligations.
Are small business loans taxable?
No, business loans are not taxable because they are considered debt that needs to be repaid rather than income.