Yes. SBA grants are considered taxable income in the United States. A government grant issued to a business is included in the business’s gross income and is therefore taxable. Most often, grant funds are considered taxable income on your federal tax return.
This simply entails that you will be expected to pay taxes on these funds. However, the financial impact of a grant during tax time depends on multiple factors, including your business structure. To be safe, you should expect that the majority of grants in the United States are considered taxable income. If you are not sure whether a grant is taxable, you should carry out extensive research.
Take your time to go through all terms and conditions, contact the grantmaker, or check out what the IRS has to say about taxable income. You can also reach out to your accountant or tax professional to understand more about how grants affect your taxable income.
However, the general rule that grants are taxable may not apply to COVID-19-related grants. The COVID-19 pandemic qualifies as a disaster, therefore federal, state, and local government grants for COVID-19-related expenses are tax-free.
Funds obtained via any of these programs are not taxed as income on federal returns, and you can deduct expenses paid with your grant money. Howbeit, you may be expected to report these funds on your state taxes as some states don’t agree with the federal government on this.
Government Grants and How They Impact Your Taxes
Have in mind that the SBA does not offer grants for starting and expanding a business. Rather, they offer grants to nonprofits, resource partners, and educational organizations that support entrepreneurship through counseling and training programs. Here are various types of COVID relief funding and how they may impact your business taxes.
Paycheck Protection Program
According to reports, forgiven PPP loans aren’t taxable income as long as the IRS is concerned. Also note that expenses that normally would be deductible are still deductible, even when paid with a PPP loan. However, have it in mind that some states veer from the federal code on one or both of these points.
For instance, in Utah, forgiven PPP loans are genuinely taxable income on state returns. Meanwhile, in California, only private companies that witnessed a 25% drop in gross receipts can deduct expenses paid with a PPP Loan. A good number of other states have changed their tax treatment of PPP loans and expenses within the past year, and this means that businesses may need to file amended returns.
Just as was noted above, the general rule that grants are taxable may not apply to COVID-19-related grants to individuals. According to reports, the general welfare exclusion gives room for individual taxpayers to freeze out from their taxable income payments made by government units in alignment with a qualified disaster.
Note that this includes payments for vital personal, family, and living expenses—or, more notably, payments to promote the general welfare. The COVID-19 pandemic qualifies as a disaster, therefore federal, state, and local government grants for COVID-19-related expenses are genuinely tax-free.
Also, note that grants to businesses do not qualify under the general welfare exclusion especially since they are not based on individual or family needs. Owing to that, COVID-19-related government grants to businesses are taxable income unless Congress acts to particularly exempt them from tax.
For instance, the CARES Act created the Coronavirus Relief Fund that provided $150 billion to state and local governments to (among other things) establish grant programs to aid businesses affected by the COVID-19 pandemic. The IRS made it clear that these state and local grants to businesses are taxable income. However, Congress has acted to ensure that a few types of COVID-19-related government grants are tax-free.
EIDL Emergency Advances
When Congress formulated the Coronavirus Aid, Relief, and Economic Security (CARES) Act, it ensured that low-interest EIDLs will be made available to businesses in all 50 states. Congress also made sure of a new EIDL emergency advance program that provided EIDL applicants loan advances of $1,000 per employee, up to $10,000.
Although they are called “advances,” these payments are grants—they need not be paid back and they are also tax-free. A good number of people received the EIDL advance whether or not they went ahead and completed the process to obtain an EIDL loan.
However, owing to funding issues, not all eligible businesses were paid the full $10,000 advance to which they were entitled. The EIDL advance program ended July 11 when the funding was exhausted.
State and federal COVID Grants
Just as was noted above, grants are more or less treated as income on business tax returns. However, that is not the case with two large-scale federal COVID grants: the Shuttered Venue Operators Grant and the Restaurant Revitalization Fund.
Have it in mind that funding obtained via either program isn’t taxed as income on federal returns, and you can deduct expenses paid with your grant money. However, you may be expected to report these funds on your state taxes, though some states tend not to agree with the federal government on this. State grants are a different ball game altogether.
These funds are considered income on both state and federal returns, but some states may have made exceptions for COVID-relief grants. If you are not sure about your state’s rules, consult your tax documents and reach out to a tax professional.
Note that all income, from whatever source derived, is considered a taxable income in the United States unless the tax law provides an exception. Since an SBA grant is income, it is taxable unless otherwise stipulated by law. Once you obtain a grant, it is recommended you plan ahead before you get into spending your funds.
Speak with a financial professional and be ready to set aside funds if necessary for tax purposes, and plan to include taxable grants when filing your quarterly estimated taxes.