What Are Business Grants & Are They Taxable?
Want business capital that you don't have to pay back? Welcome to the world of business grants! Learn exactly what grants are, how they work, and if business grants are taxable.
Free money is way too good to be true, right? Well, not exactly. There are business grants out there that give small business owners and entrepreneurs access to capital. However, getting a 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.
In this post, we’re going to take an in-depth look at business grants. You’ll learn what they are and how to get them. And if you’re worried about their effects on tax time, not to worry — we’ll cover that, too.
Table of Contents
- What Are Small Business Grants?
- How Do Business Grants Work?
- Types Of Grants Available For Small Businesses
- Do You Have To Pay Back Grants?
- The Pros & Cons Of Business Grants
- How To Find & Get Small Business Grants
- Are Grants Taxable?
- The Best Alternatives To Small Business Grants
- Small Business Grant FAQs
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 available for small businesses and sole proprietors that aren’t open to larger businesses).
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.
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. Provided that you qualify for the grant and are chosen as a recipient, grant funding is free money for your business.
The bad news, though, is that this makes the grant process more competitive. After all, who doesn’t want to receive free money? 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
- Free money for your business
- Helps you gain visibility
- Can take your business to the next level
- Available to businesses that don’t meet traditional funding criteria
- Strict qualification requirements
- Extremely competitive
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 grants has some great benefits that can make the whole journey worthwhile.
Free Money For Your Business
One of the biggest benefits that draw in businesses is that grants do not have to be repaid. Unlike business loans and other types of funding, you won’t have to worry about monthly payments, interest rates, fees, and additional costs.
You also won’t have to worry about putting up collateral or giving away equity in your business. Your grant is your money, and it is completely free — you never have to worry about repaying these funds.
Grants Help You Gain Visibility
If you receive a grant from a government entity or large corporation, this information will likely be shared with others via newsletters, company mailing lists, and the grantmaker’s website.
Some grantmakers even take it a step further by spotlighting its grant winners over a period of time by posting articles and updates on your company’s progress and changes made with your grant money.
In these scenarios, your business receives instant exposure with no associated marketing costs.
Grants Can Take Your Business To The Next Level
The money you receive from free grants can help you grow your business and take it to the next level. For example, you may be able to hire more employees, improve or expand your facilities, or purchase upgraded or additional equipment.
You may even be able to launch projects that help you save money in the future while also helping the environment (for example, installing solar panels on your building).
Grants May Be Available To Businesses That Don’t Meet Traditional Funding Criteria
For some businesses, grants can provide much-needed funding when it’s difficult to find elsewhere. Startup businesses without any revenue or operating history, business owners with low credit scores, and businesses within certain industries may not qualify for loans, lines of credit, or other types of funding. Businesses within underserved communities will also benefit from receiving a grant.
Though these businesses still have to meet requirements and be selected for the grant, receiving these free funds can provide the financial boost needed to succeed — without relying on high-interest funding with unfavorable terms.
The Difficulties With 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.
Grants Have Strict Qualification Requirements
Qualifying for a grant can be difficult. Each grant comes with different requirements, but it’s rare to find one that just any business can qualify to receive. Some requirements may include:
- Women-, minority-, or veteran-owned businesses
- Businesses that meet a certain size requirement (e.g., less than 500 employees)
- Revenue requirements
- Time in business requirements
- Businesses in specific industries
There may also be requirements for how funds can be spent. For example, a federal grant may be used to provide public services or improve a community. Other grants might be restricted to making your business greener, such as using solar energy or starting a recycling program within your organization.
Grants Are Extremely Competitive
It’s worth mentioning again that you will face competition when applying for a grant. Even if you check all of the boxes, there’s a chance that your business may not be selected. Another business may have a more intriguing plan or be seen as having a greater need for funding than your business. Don’t lose heart, though — just move on and keep applying for grants and seeking other sources of funding.
Applying For Grants Is Time-Consuming
The grant process from research through application can be quite time-consuming. First, you have to find grants that are a good fit for your business. Finding a suitable grant could take days or even longer. Once you’ve found a grant that seems to be a good match, you have to consider the application requirements.
At a minimum, you’ll be required to provide personal information and info on your business. You may also be required to submit additional documentation or materials. This may include a video about your business and/or how funds will be spent, a project proposal, a business plan, and/or financial statements.
Once you’ve applied, there may be additional steps before the grant is awarded. These may include a one-on-one interview, an interview with a panel of executives, or giving a presentation.
In short, finding and applying for grants isn’t like getting a business loan, which can be done in as little as a few minutes. Instead, expect to plan, put in the work, and wait a potentially long time to receive funds — if, of course, you’re selected.
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 Association: The Small Business Association (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 aren’t included as part of your taxable income. For example, college grants for individuals are not taxable, provided funds are spent on tuition expenses for the student’s chosen degree program.
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.
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.
What About EIDL Advances?
Many businesses took advantage of the Economic Injury Disaster Loan (EIDL) as a result of COVID-19. Some even got quick access to funding through the EIDL Advance.
Even though it is technically a grant, the EIDL Advance does not count as taxable income. You can also write off any qualifying expenses purchased with EIDL Advance funds. For instance, if you spent your advance on inventory, rent, and supplies, these expenses are deductible on your tax return.
There’s one last thing to note. Make sure to keep records showing how your EIDL Advance funds were spent in the event of an IRS audit.
The Best Alternatives To Small Business Grants
Let’s be honest here: qualifying for a grant can certainly be challenging. And let’s face it, there’s no guarantee that you’ll receive one, even if you devote hours to applying for grants. This doesn’t mean that you should just skip over grants that are a good match. Who knows? You may be selected, and the funds could totally change the face of your business.
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.
In addition, you can also check out Merchant Maverick’s other posts about grants, including grants for women, grants for minorities, and grants for veterans. Good luck!