Are grants taxable? – Most business grants are taxable since the IRS (Internal Revenue Service) considers them as business income. Unless a tax law states otherwise, any business grant is taxable. Business grants are free money that a business receives that the benefitting business does not need to pay back. Hence, this is a highly desirable form of business funding, despite there being tax implications.
In this article, you will learn about whether business grants are taxable or not. However, before that, you will find out what a business grant is and how it works for businesses in the United States. Finally, we will show you ways through which you will be able to find out whether a particular business grant you have received is taxable or not. Hence, to learn more about the taxability of business grants, read on through to the end of the article.
What Are Business Grants?
According to American Express,
“As a small business owner, you may need help with startup costs or funding your operations at times. When entrepreneurs need a financial boost, many look into a small business loan or line of credit. But depending on your circumstances, a business grant may be more attractive than traditional funding options.”
The eligibility of a grant depends on the grantor that offers the grant to small businesses. In most cases, these grants are for small businesses located in protected areas or operated by minority populations, women, etc. In other cases, a business also needs to belong to a particular industry to receive grants.
On the other hand, grantors include federal government agencies, state and local government agencies, big businesses, non-profit organizations, and others. Many big businesses and organizations actually provided grants to small businesses hit by the COVID-19 pandemic so as to resume or improve operations.
Basically, business grants are free money for a business, provided the benefitting business is eligible to receive the grant. These grants are a great way for a small business to help establish operations and grow without the requirement of repayment. A small business can also use grants to supplement other methods of funding a business.
Taxability Of Business Grants: Are Grants Taxable?
According to Investopedia,
“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, check the Internal Revenue Service (IRS) guidelines, or contact your grant donor or a tax professional. For most businesses, it makes sense to reserve part of a business grant for tax purposes.”
Hence, many experts recommend that rather than spending the whole of your business grants, you must consider saving some part of it so as to meet its tax liabilities.
Most business grants, including the grants that you receive from government agencies, are taxable. This is because the IRS considers these grants equivalent to business income. This holds true since, basically, the business is actually profiting from the money. Hence, you will need to pay taxes on the money that you receive as a business grant. This will effectively reduce the total amount of grants that you will receive.
In some cases, the tax law exempts business grants from taxes. For example, if you are a member of an American Indian tribe that is federally recognized, and you receive grants to expand your business, that money is tax-exempt.
However, in other cases, the money you receive as a small business (even if it is a government source), that income is taxable as per federal tax laws. In addition to that, there can be state taxes as well on a business grant, based on the state that your business is located in.
How To Find Out Whether A Grant Is Taxable Or Not?
One of the easiest ways to determine whether a grant is taxable or not is to consider discussing the situation with a professional financial advisor.
According to BankRate.com,
“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.”
The following are the factors to consider if you want to find out whether a business grant you received is taxable or not:
1. Check federal guidelines to review whether a particular business grant is subject to taxation or not. However, understand that most business grants are subject to federal taxes. Consider checking the IRS annual tax guide.
2. Many states across the US have their individual tax laws in addition to federal laws. Make sure that you go through the tax guidelines of your state. This will help you find out whether you need to pay income tax on your business grant to your state or not.
3. Your business grant agreement also consists of details about the taxability of the grant. Hence, consider reviewing the document carefully both before and after receiving your grant.
4. You can also contact the grantor organization to find out whether the business grant is liable for taxation or not. Contact the representatives who contacted you while offering you the grant.
5. A great option will be to ask a certified tax advisor or a business accountant. They will help you fully understand your tax liabilities regarding the grant. Although it will cost you some money, you will still be fully informed.
Are grants taxable? – Hope this article was helpful in finding the right answer to your question. You can see from this article that most business grants are taxable, with only a few applicable exceptions. The business grant agreement that you will sign will consist of information on whether it is tax-exempt or not. However, in most cases, you will need to pay taxes.
Since the IRS considers business grants equivalent to business income, these grants are taxable. However, if you are still unsure about a business grant’s taxability, consider checking IRS guidelines or with the organization that granted you the money. Do you have more information to add regarding the taxability of business grants? Share them with us in the comments below.