Are Small Business Grants Taxable?

This post covers grants paid to businesses and nonprofits. Grants paid to individuals, such as personal assistance or scholarships, follow different IRS rules that a tax professional can explain.

Is my grant taxable?

A grant is money you keep. A loan is money you pay back. That difference is why a grant to a for-profit business counts as taxable income under the general federal rule, while a loan does not.

Under general federal rules, money a business receives counts as gross income unless a specific law says otherwise. The IRS's Tax Guide for Small Business (Publication 334) explains how business income is reported. A grant does not get a pass just because it came from a foundation, a corporation or a government office.

For sole proprietors, grant income reported on the business return can also affect self-employment tax, because the IRS figures that tax on net earnings from the business. A CPA can show you how much of a difference it makes.

That sounds heavier than it is. The money a grant pays for is often a deductible business expense, and that deduction can cancel out much of the income.

What are the exceptions?

There are some, and they are narrow. Don't assume yours qualifies until the funder's documents or a tax professional confirm it.

• Some federal programs, by statute. Congress has, at times, passed laws excluding specific relief payments from federal taxable income. When that happens, the exclusion is written into the law or the agency's guidance for that program. If your award letter doesn't say it, don't assume it.
• Grants to nonprofits. A tax-exempt organization generally doesn't pay federal income tax on grants that support its exempt purpose, according to the IRS. That is a different lane from a for-profit business. If you run a nonprofit, start with how to write a nonprofit grant application instead.
• State differences. Your state income tax may treat a grant differently from the federal return. Some states have excluded particular grants from state income, and some haven't. Your state revenue department or a CPA can tell you which applies.

Buying equipment is not an exception. A grant that pays for equipment is still income. What changes is the timing of the deduction, because the IRS's depreciation rules (Publication 946) may spread the cost over several years, though some rules allow faster write-offs. Ask your CPA which method fits.

How does the deduction offset work?

The grant adds income, and the new spending it pays for adds deductions. When both land in the same tax year, they can roughly cancel.

Picture Dana, who runs a small bakery. This is a made-up example. She wins a $10,000 grant and spends it all this year: $6,000 on wages for a new part-time baker and $4,000 on a local marketing campaign. Her income goes up by $10,000. Her deductible expenses go up by $10,000. The grant adds little or no taxable profit.

And the grant still paid for a new part-time baker and a marketing push. The money did its job, and the tax barely touched it.

Now change one detail. Dana pays the $6,000 in wages this year but runs the $4,000 marketing campaign next January. This year, her taxable income rises by $4,000, because the grant arrived but that expense hasn't happened yet. Next year, she gets the $4,000 deduction. Same grant, same spending, different tax bill in each year.

What form will I get and when do I report it?

You may get a Form 1099-G, a different information return, or nothing at all. The IRS says government agencies use Form 1099-G to report certain government payments, including taxable grants. A private foundation or corporation may send a different form or none.

No form doesn't mean no tax. Grant income is reportable whether or not a form arrives, so keep the award letter and your deposit record as proof of the amount and date.

A business using cash-basis accounting generally reports income in the tax year it receives it. Accrual-basis businesses may have different timing. Your CPA will know which method you use and when the grant belongs on your return.

How much should I set aside?

Enough to cover the tax on any grant money you won't spend on deductible costs this year, and your CPA can put a number on it. The safest habit is to move part of the grant into a separate account the day it lands, not in April.

Picture Luis, a sole proprietor with a mobile pet-grooming van. This is a made-up example. Say a $20,000 grant arrives in October, in a year Luis would normally clear about $15,000 in profit. He spends $12,000 of it on wages for a part-time helper this fall and plans to spend the other $8,000 on marketing next spring.

This year, Luis's taxable profit could rise from about $15,000 to as much as $23,000, because the unspent $8,000 counts as income now while its deduction waits until next year. That extra profit can raise his self-employment tax too. So he parks a slice of the grant in a separate savings account and asks his CPA how much to keep there.

The IRS says sole proprietors, partners and S corporation shareholders generally have to make estimated tax payments if they expect to owe $1,000 or more when they file. A grant can push you over that line even in a quiet year.

When should I call a tax professional?

Call before you spend, not after you file. A short conversation can change your timing and save real money. Reach out if:

• The grant is large compared with your usual profit.
• You plan to buy equipment, vehicles or property with it.
• The award letter mentions a tax exclusion and you're not sure it applies.
• The money arrives late in the year and won't be spent until next year.
• You're a sole proprietor and want to know the self-employment tax effect.
• Your state's treatment might differ from the federal rules.

A CPA or enrolled agent can look at your books, your entity type and the grant's terms together. Nothing in this post replaces that.

Taxes come after the money arrives

The tax question only starts once a grant lands. Until then, the work that matters is finding programs you fit and applying well.

If you're still planning, it helps to know how much a small business grant really is so you can budget for both the project and the tax. Then check the live deadlines list for the dates published by funders, so you can pick a program that fits your schedule and apply at your own pace.

Sources

• IRS Publication 334, Tax Guide for Small Business
• IRS: About Form 1099-G
• IRS: Estimated Taxes
• IRS Publication 946, How To Depreciate Property
• IRS: Self-Employment Tax (Social Security and Medicare Taxes)