The SBA (U.S. Small Business Association) is a US government agency that provides support to entrepreneurs and businesses by connecting them with lenders and funding opportunities to help them grow their businesses.
The SBA has a grant scheme that provides limited small business grants and other grants to eligible community organizations that promote entrepreneurship through education, research, or non-profit routes.
However, due to COVID-19, the SBA has stepped up to grant businesses and individuals relief grants to help them through the difficult financial time due to loss in revenue.
If you are accepted for an SBA grant, you do not need to pay it back to the agency, however, what most people want to know is if SBA grants are taxable?
We’ll answer this question and also tell you everything you need to know about taxing SBA grants.
Are Sba Grants Taxable?
Yes, SBA grants are taxable, this is because a grant is considered income, and all income is taxable. However, some laws may provide an exception for tax on SBA grants but you will need to double-check with the regulations with the grant you were given.
As of COVID-19, the SBA has put forth numerous exemptions for tax on SBA grants for businesses and individuals who have struggled financially and lost business due to the pandemic.
SBA Tax Exemptions
Shuttered Venues Grant
The Shuttered Venues Grant scheme provides businesses or organizations such as live venue operators, theatrical producers, museums, movie theatres, talent representatives, and more with a grant to cover payroll costs, rent, utilities, and personal protective equipment (PPE).
However, the business must demonstrate a 25% reduction in revenue due to the pandemic.
The Shuttered Venues Grant is tax-free and expenses paid with these grants are tax-deductible.
Economic Injury Disaster (EIDL) Advance
Due to the pandemic, Congress made the Coronavirus Aid, Relief, and Economic Security Act (CARES) which made low-interest Economic Injury Disaster Loans (EIDL) available to businesses in all 50 states.
These loans are to be repaid, however, the amount received is non-taxable and expenses paid with the loan are tax-deductible.
Congress also then established the EIDL Advance program that gave EIDL applicants advances of $1,000 per employee, up to a maximum of $10,000. Recipients did not have to be approved for the EIDL loan to be eligible for the Advance program, however, the amount of the loan Advance was deducted from the total loan eligibility.
Those who received an EIDL advance as well as a Paycheck Protection Program loan (PPP) won’t have to reduce the forgiveness amount of the PPP loan from their EIDL Advance payment.
Even though these were called ‘advances’ these payments are grants and do not need to be paid back. The EIDL Advance is non-taxable for federal taxes and expenses paid with advance are deductible.
The EIDL Advance program has now ended due to running out of funds.
Restaurant Revitalization Fund (RRF)
The RRF was established by the American Rescue Plan Act of 2021 - administered by the SBA. The program provides emergency financial assistance for eligible restaurants, bars, and other qualifying food businesses impacted by COVID-19.
Eligible businesses can apply for grants of up to a maximum of $5 million for restaurants and $10 million for restaurant groups, however, this is limited to a demonstration of decline in revenue between 2020 and 2019.
Amounts received from the grant by a business must be used to cover eligible expenses from the period of February 2020 to December 2021. Any unused funds from the RRF grant must be paid back by the business.
Businesses cannot apply for the Restaurant Revitalization Fund program if it has applied or chooses to apply to the Shuttered Venues Operation Grant.
However, eligible businesses can apply for the Restaurant Revitalization Fund Grant and Paycheck Protection Program (PPP), however, amounts received by RRF will be decided by the amount of PPP loan received.
The Restaurant Revitalization Fund grant is non-taxable and eligible expenses paid with funds received are deductible.
What If My Grant Isn’t Listed Above?
If the grant you have been awarded is not listed above, then it will be included in gross income and therefore will be taxed.
The COVID-19 related grants to individuals are tax-free, however, COVID-19 related grants (external to SBA grants) that have been allocated to businesses do not qualify as tax-free and are generally taxable unless specified by regulations.
Each state has its laws regarding income tax, so you’ll need to check on what the regulations are regarding the area you live in.
Federal law also allows small businesses to receive tax deductions on their income for making charitable contributions through non-food inventory, food, and intellectual property.
However, if you have been approved for an SBA grant, it is highly unlikely that you will be donating assets, property, or inventory to a charitable organization as you won’t be in a financial position to do so.
Paying Taxes On Your SBA Grants
In normal circumstances outside of the pandemic, or if you are not exempt from paying taxes on SBA grants, you’ll need to factor in these grants when filing your taxes for the year as it is considered taxable income.
Your state income tax obligations will depend on your business structure with sole proprietors reporting business and personal income taxes with the same form.
You’ll need to declare your SBA grants on your federal tax return otherwise you may face serious federal implications and may be ineligible for any Sba or federal grants in the future.
To find out more on your eligibility for SBA grants or to look further into the regulations regarding tax on SBA Grants should visit the SBA website or contact them for further information.