It can be confusing to know if grant money is taxable or not. This is because the rules around grants and taxes are complex.
You’re not alone in wondering about this. That’s why we wrote this article about it. Here we explain how to determine if your grant money is taxable, and what to do if it is. We also provide a few tips for reducing your tax bill on grants.
Is grant taxable? Yes, grant income is taxable. The money you receive as a grant is almost always taxable income. This covers payments for research, white papers, reports, or other services or items that you will provide. The tax status is determined by the type of products and/or services you will provide and the company structure.
This sort of grant income should be recorded on your excise tax return.
Is Grant Taxable?
Grant income is usually taxable money. This covers fees for research, white papers, reports, or other services or products that you will provide. The tax classification is based on the type of goods and/or services you will provide. You must fill out an excise tax return for this sort of grant income.
Some grants are excluded from your taxable income. College scholarships for individuals, for example, are not taxable if the money is spent on tuition fees for the student’s selected degree program.
Unfortunately, this isn’t the case for the majority of business grants. In most cases, grant money is considered taxable income in your federal tax return. This means you’ll have to pay taxes on these funds. The tax impact of a grant is determined by a number of factors, including your company structure.
Examples:
- A report is prepared in exchange for grant funds. This money is subject to B&O tax under the Service and Other Activities classifications.
- You earn grant money. In return, you offer certain retail items or services. This money is subject to both sales and B&O taxes, as well as retail sales tax.
You do not owe taxes on the amount if you receive grant money that is entirely free, such as a present or a contribution. To claim this deduction, there must be a giving or charitable purpose for handing over the cash.
Calculating Taxes On Grants
Converting the tax status of a grant can be a challenge. There are various factors that determine how your business will pay taxes on the money you receive. These include:
- The type of goods or services provided in exchange for a grant, and
- Your company structure.
In general, when you receive a grant to provide goods or services, the funds are taxable. In this case, your company owes taxes on the income. This applies even if you’re a non-profit that accepts grants. Your company structure also has a large impact on how you report and pay taxes.
If you do not have a company structure, your income is taxed under your business name. This means that you’ll pay taxes directly on the grant money. Your tax rate will depend on your personal circumstances.
The tax status of the grant is different if it’s solely a gift. In this case, your company won’t owe taxes on the revenue received. This doesn’t usually cover businesses, however, as gifts are normally given to individuals or charitable organizations for free goods or services.
Note: The above rules refer to all forms of federal, state, and local grants. The only exceptions are scholarship grants which you may use for higher education costs. These funds do not count as taxable income in most cases.
How To File Grants On Your Federal Taxes?
Include the taxable amount of scholarships, grants, and fellowships in the overall for your federal income tax return’s “Wages, salaries, tips, etc.” line:
- Line 1 of IRS Form 1040EZ
- Line 7 of IRS Form 1040A
- Line 7 of IRS Form 1040
You’re done if you have the taxable amount of scholarships, grants, and fellowships on an IRS Form W-2.
If the taxable amount was not included on your Form W-2, write “SCH” and the amount not reported on:
- The space to the left of line 1 on IRS Form 1040EZ
- The space to the left of line 7 on IRS Form 1040A
- The dotted line next to line 7 of IRS Form 1040
State Taxes On Grants
All states also provide grants to individuals and organizations, so what are the tax consequences of receiving money or supplies/equipment from your state?
Regardless of the type, all state grants are taxable income to you. If you are self-employed, report this money on your Schedule C. It’s simply business, not personal, revenue.
If you received anything for free or on loan, including the value of the goods or equipment as income. If you’re not sure how much something is worth, use a reasonable approximation.
You might or may not receive an IRS Form 1099 indicating how much money you received in grants during the year. Even if you don’t get this form, you must disclose grant money as income.
Conclusion
The money you receive as a grant is almost always taxable income. This covers payments for research, white papers, reports, or other services or items that you will provide. The tax status is determined by the type of products and/or services you will provide and the structure of your company. If you are uncertain about the taxability of your grant, be sure to speak with an accountant or other financial professional. By understanding how grants are taxed, you can avoid any surprises that come at tax time.