Grants can give your business an injection of working capital when you need it the most. And, unlike loans, the money does not need to be repaid. However, in most cases, grants are taxable income for a business. It’s important to understand the terms and conditions of any grant program you apply for so that your company is financially prepared come tax season.
Read on for a closer look at how business grants work, how to find and apply for one, plus tips for doing your taxes if you receive one.
What Are Business Grants?
A business grant is a lump sum of money given to a small business for either a specific purpose or to help cover general operating expenses in order to help that business succeed. Business grants are offered by government agencies, nonprofit organizations, and private businesses. Depending on the program, you could receive anywhere from a few hundred dollars to hundreds of thousands of dollars.
Small business grants can be helpful for all types of small businesses, particularly those that are just getting off the ground and may not qualify for traditional types of financing, such as small business loans.
How Business Grants Work
Business grants often become available when a government agency, nonprofit organization, or corporation decides to set aside money for a particular area of interest or concern. Their focus might be helping minority- or women-owned businesses, promoting research and development in a specific industry, or bringing more businesses into an underserved community. Whatever their concern, the organization, agency, or business will then start a grant program by putting money aside and establishing qualifications and an application process.
Grants differ from small business loans in that they typically don’t have to be repaid. However, that doesn’t mean there are absolutely no strings attached. Often, the grantor will have strict reporting requirements to make sure you adhere to the terms of the funding. For example, if you received a grant to develop a specific product or achieve a specific goal, you will likely need to provide paperwork to show that you are indeed using the money for this purpose.
Types of Business Grants
Just as there are many types of business loans offered by a variety of lenders, there are also different types of small business grants offered by various entities. Here are some of the most common types of business grants.
• Federal business grants: These are offered by federal government agencies, including the U.S. Small Business Administration (SBA), to businesses that benefit the public or focus on certain areas of research and development.
• State and local government grants: Many small business grants are offered at the state and local government level. States often provide grants to businesses that can help further their economic goals, such as child care centers or companies that are developing alternative sources of energy.
• Startup grants: This type of grant is designed to provide the seed funding for a company that is just getting off the ground.
• Grants for women- and minority-owned businesses: Some organizations offer grants specifically to help underserved groups, such as women and minorities, start or grow their own businesses.
• Grants for veterans: There are a number of grants available specifically to assist business owners who are currently serving or have served in the U.S. military.
How to Get Business Grants
The first step to getting a small business grant is to do some research to find a grant your business qualifies for.
A good place to start your search is the federal government’s grant directory at Grants.gov. You can also check the SBA’s website at www.sba.gov (which offers a loans and grants search tool), along with your state’s official web page. If you are a woman, you may want to look into the Amber Grant. If you are a veteran, it can be worth looking into grants offered through the military.
Before you apply for a small business grant, you’ll want to make sure you meet all of the qualification requirements. Business grants are competitive and the application process can be labor-intensive. You don’t want to invest a lot of effort into a grant you aren’t likely to get. Also take note of deadlines to make sure the date hasn’t passed and you’ll have enough time to put together your application.
If you find a grant that fits the bill, the next step is to fill out the application and supply any other requested information or financial records. Take note of when the application period closes and when winners will be selected.
If you’re selected to receive a grant, the grantor will notify you about your funding along with the details about the process for reporting your use of the funds. Once you’ve agreed to the terms, you will receive the proceeds of the grant.
Are Grants to Businesses Taxable?
Typically, yes. Unless your company or the grant meets specific exemption requirements, any funds received as a grant counts as income. This applies to federal taxes and typically state taxes, as well. You will need to report any grant funds you’ve received as part of your business income for that tax year. Depending on your deductions, you may need to pay taxes on the funds.
Recommended: Is Business Loan Interest Tax Deductible?
Which Business Grants Are Not Taxable?
Business grants are not taxable in all situations. Exceptions include:
• Nonprofit recipients: Not-for-profit businesses are usually considered tax-exempt under the 501(c)(3) section of the IRS code. Consequently, a grant would typically be considered nontaxable income if the purposes are relevant to the nonprofit’s mission.
• COVID-19 relief grants: Two government grant programs related to pandemic are not taxable — the Shuttered Venues Grant and the COVID-19 EIDL.
• Grants made by a federally recognized Indian tribe: If a grant is made by the government of a federally recognized Indian tribe to a member to expand an Indian-owned business on or near reservations, the grant is generally not taxable.
Business Grant Tax Tips
If you’re trying to determine whether or not small business grants are taxable, here are some tips that can help ensure you’re not caught with an unexpected tax bill.
• Ask questions before (and after) receiving the grant. Read the terms and conditions of your grant agreement carefully (it may outline your tax obligations) and ask any questions you have. Understanding your tax liability can help you determine how much of the funding is available to use.
• Set aside some grant money for taxes. Before you spend all of the proceeds from a business grant, it’s wise to set aside the amount you will likely owe in taxes. Typically, grant funds will be taxed at the same rate as any other business income.
• Include grants in estimated taxes. If you pay quarterly estimated taxes, you’ll want to include any grant funds you received during that quarter when estimating how much you owe in taxes for that quarter.
• Keep good records. If you received a government grant that is not considered taxable income, it’s important to keep records showing how the funds were spent in the event of an audit by the Internal Revenue Service (IRS).
• Consult a tax professional. It can be a good idea to use a small business tax consultant to help with your taxes and review grant paperwork.
State and Local Tax Laws
While state tax laws vary, you may also have to report grant funds as income on your state tax returns. To help businesses understand their state tax obligations, some states have economic development corporations or agencies whose websites include tax guidelines for small businesses. You may also want to check your state’s Department of Revenue website.
Recommended: Grants for Georgia Small Business
The Takeaway
Grants can be a huge help for small businesses in any growth stage. And, while they are essentially free money, grant funds are still counted as business income in most instances. If you are able to secure grant funding, it can be a good idea to set aside some of that money to cover your federal and state tax obligations. Grants are typically taxed at the same rate as any other business income.
If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.
FAQ
Are all business grants taxable?
Most are. Exceptions include certain government relief grants, grants by and for federally recognized Indian tribes, and nonprofit recipients of grant funds.
How can you estimate taxes for a business grant?
A business grant is generally taxed at the same rate as any other business income. You can estimate how much tax you’ll owe by applying your usual tax rate.
Are there any downsides to accepting business grants?
While business grants are essentially free money, there are a couple of downsides to accepting a business grant. For starters, you may need to use the money for a specific purpose. You also may need to adhere to specific reporting requirements to prove that you are using the grant for its intended purpose. Also keep in mind that, unless you run a nonprofit business, you will typically need to pay taxes on any grant proceeds you receive.
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