The Tax Consequences of a Grant

What are the tax consequences of receiving a grant from your state?

Such state grant programs may be a one-time payment or reoccurring payments. They may also be in the form of reimbursing family child care providers who purchase supplies or equipment.

Should you accept a grant from your state?

The answer is always - yes! - even though grants are taxable income.

Unfortunately, when some family child care providers hear that they will have to report the grant as income they are reluctant to apply for it. Here’s why this thinking is wrong.

You must report as income on IRS Form Schedule C any grant you receive. This includes cash, training vouchers, or equipment. It’s all income whether you buy the toys or equipment yourself or you never see the money because the grant agency has them delivered to your home.

Normally, when your income goes up, your taxes go up. However, when you use the grant to purchase items for your business, you can deduct these as business expenses. This will probably wipe out most, if not all of your income. As a result, you may not pay any more in taxes because of the grant.

Examples

Let’s look at several examples:

If you used the grant money to buy items that are used 100% for your business, you can deduct 100% of the cost and you won’t pay any more in taxes.

$150 worth of small toys used 100% for business = $150 business deduction

$1,000 playground equipment used 100% for business = $1,000 business deduction

If you use the grant money to buy items that are used by your business and your family, you can deduct the Time-Space Percentage of the cost. Let’s assume your Time-Space % is 40% for these examples.

$150 worth of small toys used by your business and your family = $150 x 40% = $60 business deduction. You will owe taxes on $90 ($150 grant income – $60 business expense).

$1,000 playground equipment used by your business and your family = $1,000 x 40% = $400. You will owe taxes on $600 ($1,000 grant income – $400 business expense).

Taxes

Should you turn down a grant because it might raise your taxes? No!

In the second set of examples above, the provider will owe taxes on $90 or $600. If your tax bracket is 30% your additional tax is $30 for the toys or $180 for the playground equipment. So, you paid $30 in taxes for $150 worth of toys and $180 in taxes for the $1,000 playground equipment. That’s still a deal!

Some state grants may limit what you can spend the grant money on. Be sure to follow these rules. Also, some states may issue an IRS Form 1099 to report this grant as income. However, even if your state does not issue you a Form 1099, it is still taxable income. Lastly, some states may say that their grant is not taxable income for state income tax purposes. If that is the case, the grant is still taxable income for federal income tax purposes.

Conclusion – don’t let the prospect of maybe paying a little more in taxes cause you to not apply for a grant. Grants are a good thing!

Tom Copeland – www.tomcopelandblog.com

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