Receiving a business grant is a boon for any business owner. Because you don’t have to repay the funds, they’re generally a more desirable source of funding than taking out a loan or purchasing goods on credit. However, most business grants are taxable. That means that you’ll need to plan to include the grant as taxable income. Depending on the size of the grant, it may significantly increase your tax liability.
In order to avoid unpleasant surprises at tax time, it’s best to find out whether your business grant is taxable, then plan ahead to ensure you can account for the increased income.
When are business grants not taxable?
Generally, most business grants are considered taxable income, including COVID-19 relief. In some cases, the tax code makes exceptions, such as grants made by a federally recognized Native American tribe, or grants made to a nonprofit organization in furtherance of their mission.
How to find out if your grant is taxable
If you’re not sure whether your business grant is taxable, there are a few options to find out. First, you can look at federal IRS guidelines to see if you qualify for any exemptions. Even if the grant isn’t federally exempt, you may be exempt from state tax liability. Check the IRS and the State Department of Revenue websites to find out. If you can’t find anything on state tax liability,
there may be statewide economic development agencies who can answer your question.
Next, you can check your grant agreement. When you receive a business grant, you’ll receive a terms and conditions document. This document should tell you whether you’re obligated to pay state and/or federal taxes on any money you receive. If the terms and conditions fail to address taxation, reach out to the organization funding the grant.
Finally, you can ask your tax professional. Tax advisors and preparers can help you determine whether your grant is tax-exempt and how that will affect your tax liability for the quarter or year.
How to plan ahead for your business taxes
Once you find out that your business grant is taxable, you’ll need to plan ahead. In short, avoid spending the money as soon as you receive it.
First, talk to your tax professional and/or bookkeeper about how the grant will affect you. Once you understand how much additional liability you can expect, you can make a plan for how much you should set aside and how to manage that money, such as placing it in a high-yield savings account until you need it.
Finally, your business advisor can help you decide how to use the rest of the funding. Some grants have specific rules for how the funds can be used, while others allow the grant to be spent at the owner’s discretion.
When you need skilled tax preparation and bookkeeping services, MCG Solutions is here to help. Reach out today to get started.