Taxing Grants: What Family Child Care Providers Need to Know

Many family child care providers have received financial support from state or federal government programs. This support may have come in various forms such as grants, stipends, emergency relief funds, CARES Act funding, or other assistance. The funds could have been one-time payments, recurring stipends, or even tangible items like supplies or equipment.

While this aid is valuable, it’s important to understand the tax implications of receiving money or goods from these programs.

Are Grants Taxable?

Yes, in almost all cases, grants are considered taxable income. Whether it's a monetary grant or equipment provided to you, it should be reported on your Schedule C if you are self-employed. This income is classified as business, not personal income.

For tangible items like supplies or equipment, you’ll need to report the value of those items as income. If the cost isn’t provided, you can estimate their fair market value.

Even if you don’t receive a Form 1099 from the state or agency detailing the grant amount, you are still required to report it as income when filing your taxes.

The Upside: Tax Benefits of Grants

Although grants are taxable, they still provide a significant financial benefit. You will typically pay around 30-40% in taxes (federal, state, and self-employment), which means you still get to keep the majority of the grant. This makes grants a net positive for your finances. So, if you ever have the opportunity to apply for one, don’t hesitate—you're always financially better off with a grant!

Examples of How Grants Affect Your Taxes

• Scenario 1: You receive a $2,000 grant and spend it all on supplies or equipment solely for your business. In this case, you can deduct the entire $2,000 as a business expense, meaning you won’t owe any taxes on the grant.

• Scenario 2: You receive a $2,000 grant but use the supplies or equipment for both your business and personal use (for example, toys used by your own children). In this situation, you would only be able to deduct a portion of the $2,000 based on your Time-Space Percentage. If your percentage is 30%, you could deduct $600 as a business expense ($2,000 x 30% = $600), meaning you would owe taxes on the remaining $1,400. However, even if you're in a high tax bracket (40%), you’d owe $560 in taxes, leaving you with $2,000 worth of items at a cost of just $560. Still a great deal!

State vs. Federal Tax Treatment

Some states may declare that their grant funds are not subject to state income tax, but these funds are still taxable at the federal level. You’ll also need to pay Social Security and Medicare taxes on any grant funds reported on Schedule C.

It’s important to differentiate between grants and forgivable loans from the Small Business Administration (SBA). Money received from programs like the Paycheck Protection Program (PPP) or Economic Injury Disaster Loan (EIDL) is generally not considered taxable income.

How Can You Spend Grant Money?

Some states restrict how grant money can be used, typically allowing it to cover “wages” or “operating expenses.” If your state gives you this flexibility, you could pay yourself as payroll and then use that income for various needs, such as home improvements, retirement contributions, or purchasing equipment.

If your state does not impose strict spending guidelines, you might consider using the funds for things like:

• Home improvements that benefit your business (e.g., playground surfacing, fences, child-friendly furniture).

• Retirement contributions.

• Purchasing additional business equipment (e.g., computers, educational materials, or new toys).

If you're receiving recurring stipends from your state, it’s wise to save a portion rather than feel pressured to spend it all. Setting up an emergency fund, paying off debt, or saving for retirement are great alternatives to spending the money immediately.

Conclusion

States have received millions in new funding to support child care businesses. This means there are likely new opportunities for grants, equipment, and training available in your area. Contact your local Child Care Resource and Referral (CCR&R) agency to stay informed about these opportunities.

If you have the chance to apply for a grant, take it! Even after accounting for taxes, you will always be financially better off. Grants are an excellent way to strengthen your business and improve your financial stability.