Starting or expanding a small business often requires additional capital. While traditional business loans can provide funding, small business grants can be another option because eligible recipients may receive funds without the same repayment requirements associated with loans.
Grant programs are available through government agencies, nonprofit organizations, corporations, and other private organizations. Some programs are designed to support specific groups of business owners, industries, communities, or business objectives.
However, obtaining a grant is not as simple as submitting an application. Business owners should understand the eligibility requirements, application process, restrictions on the use of funds, and potential tax consequences before accepting grant money.
What Is a Small Business Grant?
A small business grant is financial assistance provided to an eligible business for an approved purpose. Depending on the program, grant funding may help a business launch operations, purchase equipment, develop products, expand its workforce, improve its facilities, or pursue another qualifying business activity.
Unlike a conventional business loan, a grant generally does not require repayment when the recipient follows the program's rules and uses the money as required.
Grant programs can come from both public and private organizations. Government-funded programs may have detailed eligibility requirements and reporting obligations, while private grants may establish their own criteria and restrictions.
Because every program is different, business owners should review the official grant documentation carefully before applying.
Why Small Business Grants Can Be Difficult to Obtain
The possibility of receiving funding without traditional loan repayment makes grants attractive to many entrepreneurs. As a result, some programs can be highly competitive.
Another important consideration is that grant money is usually not unrestricted cash. A program may specify exactly how the funds can be spent, establish a maximum award amount, require the recipient to meet certain milestones, or impose reporting requirements.
For example, a grant may be approved for a particular project rather than for general business expenses. Spending the funds outside the permitted purpose could result in financial or other consequences, including a requirement to return some or all of the funding.
Before accepting a grant, review the agreement and make sure you understand:
- Who is eligible to receive the funding
- Which expenses qualify
- How much funding is available
- Whether matching funds are required
- What documentation must be maintained
- Whether progress or financial reports are required
- What happens if the grant requirements are not satisfied
Preparing a Strong Grant Application
Applying for a grant can require significant preparation. Depending on the program, an application may request information about the business, its owners, financial condition, proposed project, budget, and expected results.
Business owners should avoid treating a grant application as a last-minute task. Start by identifying programs that actually match the business's industry, location, size, ownership characteristics, and intended use of the funds.
Once an appropriate opportunity is identified, carefully follow the application instructions and gather the required documentation before submitting the application.
Keeping organized financial records can also make the process easier and help demonstrate how the business plans to use the funding.
How Small Business Grants May Affect Your Taxes
Receiving a business grant can create tax considerations. In many situations, grant money received by a business may be included in taxable income. However, the federal tax treatment can depend on the type of grant, the recipient, the purpose of the funding, and the specific rules governing the program.
For that reason, business owners should not automatically assume that every grant is tax-free simply because the funds do not have to be repaid.
Certain programs may receive special tax treatment or exceptions under federal law. For example, specific COVID-19 relief programs and certain grants involving federally recognized Indian tribes may have special rules. Tax treatment for nonprofit organizations can also differ from that of for-profit businesses.
Because these rules can change and exceptions may apply, grant recipients should review the applicable IRS guidance and grant documentation or consult a qualified tax professional.
Keep Detailed Records of Grant Funds
Good recordkeeping is particularly important when a business receives grant funding.
Maintain copies of the grant application, award documentation, agreement, correspondence, receipts, invoices, bank records, and other documents showing how the funds were received and spent.
Accurate records can serve two important purposes: helping the business satisfy the grantor's reporting requirements and supporting the tax treatment reported on the business's tax return.
Whether the funding is used for equipment, inventory, payroll, marketing, facility improvements, technology, or another approved business purpose, maintaining a clear paper trail is a smart business practice.
Plan for the Potential Tax Liability
If a grant may be taxable, business owners should consider the potential tax impact before spending the entire award.
Setting aside a portion of the funds for potential federal or state tax obligations may help prevent an unexpected cash-flow problem when the business's tax return is prepared.
The appropriate treatment should be evaluated based on the specific grant and the business's circumstances rather than relying on a general assumption that all grants are either taxable or tax-free.
Get Professional Guidance Before Accepting Grant Funding
Small business grants can provide valuable funding, but the financial benefit should be evaluated together with the program's requirements and potential tax consequences.
Before accepting or spending grant money, review the grant agreement, understand the permitted uses of the funds, maintain complete records, and determine whether the funding must be reported as income.
ContNow Tax Preparation LLC can help business owners organize their financial information and review potential tax reporting considerations. When a situation involves complex federal tax rules or requires a legal or technical determination beyond our scope, we recommend consulting an appropriately qualified CPA, Enrolled Agent, or other tax professional.
Important: Tax treatment depends on the specific facts and circumstances. Grant recipients should verify current federal and state requirements before filing a tax return or making decisions based on grant funding.
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