New Laws—COVID-19-Related Government Grants: Taxable or Not?
In an effort to stave off economic devastation caused by the COVID-19 pandemic, billions of dollars in grants are being handed out to individuals and businesses by the federal government and by state and local governments as well.
Are these grants taxable? Like most things in the world of taxes, it depends.
What Is a Grant?
This might seem like a dumb question, but we’ll answer it anyway because there are no dumb tax questions. A grant is money you don’t have to pay back. In contrast, you have to pay back a loan. For example, a Small Business Administration (SBA) Economic Injury Disaster Loan (EIDL) has to be paid back. Loans that have to be paid back are never taxable income to the borrower. Some COVID-related loans (Paycheck Protection Program (PPP) loans, for example) can be forgiven by the government. When this occurs, the loan effectively becomes a grant.
General Rule: Grants Are Income
All income, from whatever source derived, is taxable income unless the tax law provides an exception. Since a government grant is income, it is taxable unless otherwise provided by law.
COVID-19-Related Grants to Individuals
Fortunately, the general rule that grants are taxable does not apply to COVID-19-related grants to individuals. The general welfare exclusion allows individual taxpayers to exclude from their taxable income payments made by government units in connection with a qualified disaster. These include payments for necessary personal, family, or living expenses—or, more broadly, payments to promote the general welfare.
The COVID-19 pandemic is a qualified disaster, so federal, state, and local government grants to individuals for COVID-19-related expenses are tax-free. This would include, for example, the $25 billion in new rental assistance authorized by the recent enactment of the new stimulus bill that was signed into law by the president on December 27, 2020.
COVID-Related Grants to Businesses
Payments to businesses do not qualify under the general welfare exclusion because they are not based on individual or family need.3 Thus, COVID-19-related government grants to businesses are taxable income unless Congress acts to specifically exempt them from tax.
For example, the CARES Act established the Coronavirus Relief Fund, which gave $150 billion to state and local governments to (among other things) establish grant programs to help businesses impacted by the COVID-19 pandemic. The IRS has made clear that these state and local grants to businesses are taxable income.
State and local grants to businesses funded outside the CARES Act are also taxable income to the businesses. But Congress has acted to make a few types of COVID-19-related government grants tax-free, as described below.
EIDL Emergency Advances Are Tax-Free
When Congress enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act, it made low-interest EIDLs available to businesses in all 50 states. Congress also established a new EIDL emergency advance program that gave EIDL applicants loan advances of $1,000 per employee, up to $10,000. Although they’re called “advances,” these payments are actually grants—they need not be paid back.
Applicants received the EIDL advance whether or not they went ahead and completed the process to obtain an EIDL loan. Unfortunately, due to funding issues, not all eligible businesses were paid the full $10,000 advance to which they were entitled. The EIDL advance program ended July 11 when the funding ran out.
$20 Billion in New EIDL Advance Money Targeted to Businesses in Low-Income
The new COVID-19 stimulus bill signed into law on December 27, 2020, provides $20 billion for EIDL advance grants of $10,000 for small businesses that
were in operation by January 31, 2020, with fewer than 300 employees;
were directly affected by COVID-19;
are located in low-income communities (census tracts with a 20 percent poverty rate or 80 percent of the statewide median income); and
have suffered a decline in gross receipts greater than 30 percent during an eight-week period
between March 2, 2020, and December 31, 2021, relative to a comparable eight-week period immediately preceding March 2, 2020, or during 2019 (as far back as January 1, 2019).
In addition, the new law directs the SBA to create a process for those businesses described above that are existing EIDL advance grantees and received less than $10,000 to reapply for the difference between what they received and what they should have been paid.
No Offset of PPP for EIDL Advance—Refunds Coming
If you receive an EIDL advance and also a PPP loan, the CARES Act required the lender to deduct the advance from your PPP forgiveness, effectively denying you any benefit from the advance. The new stimulus law repeals that requirement retroactively.
EIDL Advances Are Not Taxable; Expenses Paid Are Deductible
Most important, the new stimulus law provides that the EIDL advances are not taxable income. And otherwise deductible business expenses paid with EIDL advances are tax-deductible.
Grants for Shuttered Venue Operators Are Tax-Free
The new stimulus law also gives $15 billion to the SBA to make grants to live venue operators or promoters, theatrical producers, live performing arts organization operators, museum operators, motion picture theater operators, and talent representatives who demonstrate a 25 percent reduction in revenues due to the pandemic.
The SBA may make an initial grant of up to $10 million and a supplemental grant of up to 50 percent of the initial grant. The grants must be used for expenses such as payroll costs, rent, utilities, and personal protective equipment.
As with EIDL advances, these grants are tax-free, and expenses paid with the grants are tax-deductible.
Here are eight things to know from this article:
Government grants are taxable income to the recipient unless the tax law makes an exception.
COVID-19-related grants to individuals are tax-free under the general welfare exclusion.
COVID-19-related grants to businesses do not qualify as tax-free under the general welfare exclusion and are generally taxable, including state and local grants made under the CARES Act Coronavirus Relief Fund.
EIDL advances are not taxable, and expenses paid with such advances are tax-deductible.
Business in low-income areas that received EIDL advances of less than $10,000 will be able to apply for an increase in the prior advance to the $10,000 level.
The new law sets $20 billion for EIDL advances for businesses located in low-income areas.
EIDL advances will not offset PPP forgiveness, and any such prior offsets will be refunded.
SBA grants to shuttered venue operators are tax-free, and expenses paid with the monies are tax deductible.