If You Receive a Grant, Is It Taxable?

A grant is a sum of money awarded to an individual or entity for a specific purpose. The Internal Revenue Service (IRS) may consider grant funds to be taxable income. The taxability of a grant hinges on its intended purpose, the recipient’s circumstances, and how the funds are ultimately used. The source of the grant and any conditions attached to it play a role in whether the money you receive will be subject to federal income tax.

Determining the Tax Status of Your Grant

Educational Grants

The tax treatment of educational grants, which include scholarships and fellowships, depends on how the funds are used and the student’s status. For the funds to be tax-free, the recipient must be a candidate for a degree at an eligible educational institution. The funds must be used for qualified education expenses, which the IRS defines as tuition and fees required for enrollment, as well as books, supplies, and equipment required for courses.

Any portion of a grant used to cover non-qualified expenses is considered taxable income. These non-qualified expenses include costs such as room and board, travel, and optional equipment. For example, if a student receives a $20,000 scholarship and uses $15,000 for tuition and required books, the remaining $5,000 that covers dormitory fees must be reported as taxable income.

Business and Research Grants

Grants awarded to individuals or businesses for commercial activities are viewed as taxable income. The IRS considers these funds as revenue, which must be included in the calculation of the business’s gross income. For instance, a grant from a local government to help a small business owner renovate their storefront would be taxable. The business can, however, deduct the ordinary and necessary business expenses paid for with the grant money, which can offset the income.

Research grants can have a more complex tax treatment. If a grant is given to an individual to pursue independent research, and the funds are not for teaching or other services, it may be treated similarly to a tax-free scholarship. However, if the grant represents payment for services, such as research conducted for the benefit of the granting institution, it is taxable compensation.

Government Assistance and Disaster Relief Grants

Not all government grants are taxable, as the tax code provides a specific exclusion for qualified disaster relief payments. These are grants made by a federal, state, or local government to meet necessary expenses in connection with a federally declared disaster. These expenses can include medical, dental, housing, personal property, transportation, and funeral costs, provided they are not compensated for by insurance or other means. These payments are not considered income.

This tax-free treatment is narrow and applies specifically to payments for disaster-related needs. Other government grants, such as those for energy efficiency home improvements or certain agricultural purposes, may be taxable. It is important to distinguish between grants for personal welfare after a disaster and grants that serve other purposes, like stimulating economic activity, which are more likely to be taxable.

Other Grants

Grants can come from a variety of other sources, and their tax status depends on the context. A grant from an employer to an employee is considered taxable compensation and will be included on the employee’s Form W-2. Private foundations may award grants for artistic or scientific projects, which are taxable unless they meet the stringent requirements for a tax-free prize or award, such as being selected without any action on the recipient’s part.

Required Information and Documentation

Grant Award Letter/Agreement

The official award letter or grant agreement is the primary document for determining the tax implications of a grant. This document outlines the terms and conditions of the funding, specifying the purpose of the grant, any restrictions on how the money can be used, and the expectations of the grantor. For example, an educational grant letter will often detail that the funds are for tuition and fees. The agreement may also state the grantor’s intention regarding taxes and whether they plan to issue a tax form.

Records of Expenses

You must keep detailed records and proof of how you spent the grant money, especially if you are claiming that some or all of it is tax-free. For educational grants, this means retaining all receipts for tuition payments, required books, and necessary supplies. Bank statements and canceled checks can also serve as evidence of payment. For business grants, these records are needed for documenting the deductible business expenses that can offset the taxable grant income. All receipts and invoices should be saved for at least three years after filing the relevant tax return.

Tax Forms from the Grantor

The entity that awarded the grant may send you a tax form summarizing the funds you received during the year. For instance, a college or university might issue Form 1098-T, Tuition Statement. Box 5 of this form shows the total amount of scholarships or grants administered and processed by the institution on your behalf.

If you receive a grant for services or as an independent contractor, you might receive a Form 1099-MISC, Miscellaneous Information, or a Form 1099-NEC, Nonemployee Compensation. A government entity might issue a Form 1099-G, Certain Government Payments. Receiving one of these forms indicates that the grantor has reported the payment to the IRS as income. You must reconcile the amount on the form with your own records.

How to Report Grant Income

Reporting on Your Tax Return

Once you have determined that a portion of your grant is taxable, you must report it correctly on your federal income tax return. The specific form and line you use depend on the nature of the grant. For taxable scholarship or fellowship income that was not reported to you on a Form W-2, you will report the amount on Schedule 1 (Form 1040), Additional Income and Adjustments to Income.

If you received a grant for your trade or business, the income is reported on Schedule C (Form 1040), Profit or Loss from Business. The grant amount is included in the gross receipts or sales for the business. You would then deduct your ordinary and necessary business expenses on the same schedule. This calculation determines the net profit or loss from the business.

Estimated Tax Payments

Receiving a substantial amount of taxable grant income without any tax withholding can create a large tax liability at the end of the year. The U.S. tax system operates on a pay-as-you-go basis. If you expect to owe at least $1,000 in tax from your grant income, you may be required to make estimated tax payments throughout the year.

Estimated taxes are paid quarterly using Form 1040-ES, Estimated Tax for Individuals. You must calculate your expected adjusted gross income, deductions, and credits for the year to determine the payment amount. Failure to pay enough tax throughout the year, either through withholding or estimated tax payments, can result in an underpayment penalty.