What Are Business Grants & Are They Taxable?

Business grants give small business owners and entrepreneurs access to capital that doesn’t need to be repaid. While this may seem too good to be true, the caveat is that getting a small business grant isn’t easy.

It takes work to find grants that you qualify for, and even then, competition is pretty stiff. That doesn’t mean you should automatically write-off business grants, though. It just means that you need to understand what a business grant is, what types are available, and how to find the grants you qualify for — all of which we’ll cover in this guide.

What Are Small Business Grants?

A business grant is an amount of money given to a qualifying person or company for business purposes. Depending on the grant, recipients could receive a few hundred dollars to hundreds of thousands of dollars or more.

Some grants can only be used in specific ways. Others are more flexible, allowing businesses to use funds to grow their company and improve their odds of success.

How Do Business Grants Work?

Many different grantmakers issue small business grants. These include local, state, and federal governments; private businesses; foundations; and corporations.

The application process and qualifying criteria vary depending on the grant you’re pursuing. Some grants are available only to minorities, female-owned businesses, or businesses in certain sectors. Others have requirements based on your business model (i.e., grants only available to small businesses and entrepreneurs).

Once you’ve determined you meet the qualifications, an application is required. Some grants may also require additional steps, such as creating a video about your business and its financial needs or doing an in-person interview.

One thing to note here is that even if you meet all qualifications, grants are extremely competitive. Don’t automatically assume that it’s “in the bag.” There are thousands of other qualified business owners looking to fuel their companies using grant funds.

Types Of Grants Available For Small Businesses

There are numerous grants available to different types of businesses. Let’s look at some of the most common.

• Federal Grants: Federal grants are grants that are issued by federal government agencies. These grants are typically awarded to businesses, universities, labs, nonprofits, and other entities that provide services that benefit the public. Grants for small businesses may also be available to qualified businesses and organizations to help stimulate the economy.
• State & Local Government Grants: State and local government entities have their own grant programs to give financial assistance to local businesses.
• Small Business Grants For Women: Small businesses owned by women are often underserved when it comes to obtaining capital. This is why some grantmakers issue grants for female-owned small businesses specifically.
• Small Business Grants For Minorities: Another underserved group is minorities. Fortunately, there are a number of small business grants available exclusively for minority-owned businesses.
• Small Business Grants For Veterans: Business owners or aspiring entrepreneurs currently serving or that have served in the Armed Forces may qualify for small business grants targeted at veterans.
• Startup Grants: Startup businesses in their earliest stages or that haven’t even launched yet may get the financial boost they need through startup grants.
• Research & Innovation Grants: Programs like the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) provide grants to small businesses engaged in research and development with the potential for commercialization.

Do You Have To Pay Back Grants?

Now, onto one of the biggest and most important questions: Do you have to pay back grants? The good news is that grants do not have to be repaid.

The bad news, though, is that this makes the grant process more competitive. That doesn’t mean grants are impossible to get, but you should be aware that the process can be both lengthy and difficult.

The Pros & Cons Of Business Grants

Still on the fence about researching and applying for business grants? There are several benefits to receiving a grant, making the time spent finding and applying for these grants well worth the effort. On the other hand, there are some drawbacks that you should be aware of before jumping into the application process.

The Benefits Of Business Grants

While the process can be difficult and lengthy, getting a business grant has some great benefits that can make the whole journey worthwhile.

The Drawbacks Of Business Grants

The free business capital from a grant is undoubtedly great, but there are several difficulties to keep in mind when it comes to finding and qualifying for business grants.

How To Find & Get Small Business Grants

While the process for obtaining a grant can be lengthy, there are some ways that you can shorten the process. One easy way is to turn to the internet to research and find grants that are a suitable match for your business.

Simply searching “business grants” on Google yields thousands of results, and many of them will prove to be pretty worthless. Instead, start your search here:

• Small Business Administration: The Small Business Administration (SBA) has a number of grant programs available to eligible businesses and institutions.
• Grants.gov: Grants.gov makes it easy to find and apply for federal grants. There are also various resources, such as videos, blogs, and how-tos, to help you in your search.
• Merchant Maverick: We have also done the hard work of finding and vetting various grant programs and compiling the best business grants for women, the best business grants for felons, the best business grants for minorities, and more!

Once you’ve started your research, make sure to look at the deadline for each grant. Make sure that the deadline hasn’t passed and that you have enough time to complete the application. Next, review the requirements to ensure you meet all of them.

Once you’ve verified that you meet all requirements, begin filling out your application and submitting additional information requested by the grantmaker. Make a note of any important dates, such as when different rounds start and end, when the application period closes, and when winners will be selected.

Are Grants Taxable?

Free money is great now, but how will it affect you in the future? In other words, are grants taxable income?

Some grants — particularly certain government grants and those awarded to nonprofits — may be excluded from taxable income, but this is the exception rather than the rule.

Unfortunately, this doesn’t hold true for most business grants. In most instances, grant funds are counted as taxable income on your federal tax return. This means that you will be required to pay taxes on these funds. The financial impact of a grant come tax time depends on multiple factors, including your business structure.

As a general rule of thumb, you should expect that the majority of grants are counted as taxable income.

If you’re unsure of whether a grant is taxable, do your research. Read all terms and conditions, contact the grantmaker, or check out what the IRS has to say about taxable income. You can also consult with your accountant or tax professional to learn more about how grants affect your taxable income.

Tax Write-Offs

The good news, though, is that you may have additional write-offs at tax time. Depending on how you spend your funds, you may add new tax deductions that help lower your income tax liability.

There are also some exceptions. Many grants specifically for veterans are non-taxable. Government grant funds used for paying certain utilities or the mortgage for your business may also be non-taxable.

Paying Taxes On Grants

If you’re awarded a grant, plan ahead before you dive into spending your funds. Talk with a financial professional, be prepared to set aside funds if necessary for tax purposes, and plan to include taxable grants when filing your quarterly estimated taxes.

The Best Alternatives To Small Business Grants

If you don’t qualify for business grants or you need funds immediately, a grant that won’t be awarded for months will not help you now.

Fortunately, there are other small business funding options to explore:

• Small Business Loans: A small business loan is a lump sum of cash that is repaid over a set period of time. This could be a few weeks or several years. In addition to paying back what is owed, you’ll also repay interest to the lender. Small business loans are best for specific purchases, such as equipment, inventory, or supplies. SBA loans, in particular, are low-cost, long-term loan options for qualified business owners.
• Business Credit Cards: A business credit card works the same as your personal credit card. Business expenses can be charged up to your set credit limit and then repaid over time with interest. Business credit cards are ideal for emergencies and working capital. As you repay your balance, funds become available to use again.
• Business Lines Of Credit: A line of credit is similar to a credit card. Instead of using a card for purchases, you can make cash withdrawals up to a set credit limit. Used funds are repaid over time, along with interest. If you have a revolving line of credit, funds will be replenished as you pay down your balance. A line of credit is an excellent source of working capital.
• Invoice Factoring: If you have unpaid invoices, consider invoice factoring. Your accounts receivables are purchased by a third party (or factor), giving you the funds you’re owed, excluding the factor’s fee. This is a way to access quick cash when your invoices haven’t been paid.

No matter which option you choose, make sure to do your research before diving in. Understand the cost of borrowing, compare your options, and pick the funding option that doesn’t just work for your business today but for the future as well. Good luck!