As the seasons change and businesses shift their focus towards year-end preparations, it’s crucial to address the tax implications of any grants your business has received. In this article, we’ll tell you how to determine if your business grants are taxable or not.
Generally speaking, though, business grants are taxable, and you should plan accordingly. Keep reading for more information.
Identifying Taxable vs. Nontaxable Grants
Remember, most business grants are taxable. However, there are exceptions. Nontaxable grants must meet specific criteria outlined by tax regulations and have a particular purpose, such as research and development, disaster relief or education. As a rule of thumb, federal grants given for COVID-19 relief, those given to American Indian tribes, and those distributed to nonprofits with 501 (c)(3) status are usually tax-exempt.
Grants intended for general operations or those with no specific use requirements are most likely taxable.
Four Ways to Determine Taxability
1. Study the grant agreement.
Always start with the agreement to determine taxability. It should detail the terms you are to adhere to and should also note if it’s tax-exempt. If for some reason there is no mention of its tax status, assume the grant money is taxable and follow the next suggestion.
2. Contact the grantor.
Don’t hesitate to contact the organization that granted your business the funds. The organization will know the grant’s tax status.
3. Examine state and federal tax regulations.
It’s best practice to know general tax guidelines, and especially if you receive a business grant. The IRS offers a lot of information on grants, perhaps more than you have time to read and absorb. This leads to our final suggestion for determining taxability.
4. Consult with a tax professional.
We admit that tax regulations can be complicated to a layperson. When in doubt, assume the grant is taxable and then confirm with a tax professional. At Morgan & Associates, we’ve worked with hundreds of businesses to ensure their tax filings are correct. (We’re happy to help you too.)
Proper Documentation and Record Keeping are Important
Maintaining detailed records of grant-related activities is crucial for your business throughout the year and when it’s time to prepare tax filings. These records serve as a clear trail of how grant funds were allocated and utilized.
In the event of an audit or inquiry, solid documentation provides transparency and legitimacy to your financial transactions. (It not only aids in demonstrating compliance with tax regulations but also ensures that you can address any inquiries about how you used the grant.)
Morgan & Associates Help with Grant Taxability Questions
If you have questions about the tax implications of your business grants or need assistance with tax preparation, our experienced team at Morgan & Associates is here to help. Contact us using the form below to speak with one of our knowledgeable professionals.
Don’t wait! Start preparing for tax season now.