Grants provide important capital for small businesses, and unlike loans, you don’t have to worry about paying them back later. That makes them especially appealing for many business owners. However, if you received a grant recently or are considering applying for one, you might be wondering: what happens when you reach tax time? Are grants taxable? Here’s what you need to know.
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Most Grants Are Taxable Income
Grants are considered income for your business (unlike loans, which are not taxable). That means you’ll need to report them on your annual tax return, and may need to pay taxes on them. However, there are exceptions to this rule: some government grants are not considered taxable income. You also may not end up paying taxes on grants even if they are taxable, because of business deductions. Read on below to learn more.
You May Be Able to Deduct Your Grant
Many small business owners use their grants to help grow their business by purchasing new equipment or use their grants toward expenses like rent or utilities. If you use your grant toward eligible expenses, it should be deductible from your taxes. To be sure, you should schedule an appointment with an accountant or research tax-deductible expenses and the tax considerations of your particular grant.
Is the EIDL Taxable?
If you get an EIDL loan or an EIDL Targeted Advance, you’re in luck: funds from the EIDL program are not considered taxable income. You can use the funds for most business expenses, including paying yourself. Of course, if you do get an EIDL loan, you will need to pay it back, unlike the advance. However, interest rates for the loans are lower than many market-rate lenders, and payments have been deferred until next year.
Is the PPP Taxable?
PPP loans, once forgiven, function as grants, rather than loans. However, forgiven PPP loans are not taxable, unlike private grants. Originally, business owners were unable to deduct the expenses they spent their PPP loan on from their taxes, but that ruling has been changed. Eligible expenses you use your PPP for are deductible like any other business expense.
Conclusion: Most Grants are Taxable, But You May be Able to Deduct Them
Most grants are technically taxable, with the exception of some government loans like the PPP and EIDL. However, if you use your grant for business expenses, you will likely be able to deduct it. You can work with an accountant to be sure you are filing your taxes correctly.
📌 Pro-tip: Discover the latest grant opportunities on the Skip App.