Grants provide free money you don't have to repay — making them a highly desirable form of business funding. However, though they don't require repayment, small-business grants may have tax implications for your business.
Here's everything you need to know.
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A business grant is usually considered taxable income — unless the tax law calls for some exception. Suppose you're a member of a federally recognized American Indian tribe, for example, and you receive a grant from the tribe to expand your business on or near reservations. In that case, you do not have to include those funds as taxable income .
Typically, however, the money you receive from a small-business grant (regardless of the source) is taxed as income on your federal tax return. In addition, although state tax laws vary, you may also have to report grant funds as income on your state tax returns.
In general, COVID-19 relief grants are also considered taxable income for businesses . Although these grants are subject to federal taxes, certain COVID-19 relief grants have been issued a tax exemption at the state level.
If you're unsure if your business grant funding qualifies as taxable income, there are a few things you can do.
Although most business grants are subject to federal taxes, you can review federal guidelines to ensure you don't qualify for exemptions. The IRS publishes an annual guide to taxable and nontaxable income and a tax guide for small businesses on its website.
States have individual tax laws, so you'll want to make sure that you research the guidelines in your state to see if you'll need to pay income taxes on your grant money. Some states have economic development corporations or agencies whose websites include tax guidelines for small businesses. You might also consult your state's Department of Revenue website.
Your business grant agreement may outline your tax obligations. Therefore, you'll want to review this document thoroughly before and after receiving your grant funding. Understanding the terms and conditions of your grant agreement and your tax responsibilities can help you create a financial plan and set aside funds to cover your taxes before you spend the money.
If your agreement doesn't include tax information, you need clarification or you have questions about the terms of your grant, you can reach out to your funding organization for assistance. A representative from this organization should be able to discuss your grant and answer any questions you may have.
When in doubt, a business accountant or certified tax advisor can help you understand any tax liabilities associated with your grant funding. These professionals may also be able to assist you with other tax issues and general financial planning.
Looking for other types of business financing? Check out NerdWallet's list of best small-business loans to see and compare loan options.
Our recommendations are based on the market scope and track record of lenders, the needs of business owners, and an analysis of rates and other factors so that you can make the right financing decision.