Is Grant Income Reported on a 1099?

A grant is a financial award given by a government entity, foundation, or corporation to an individual or organization for a specific purpose. Unlike a loan, a grant does not need to be repaid. The receipt of these funds can create tax responsibilities for the recipient.

Determining the Taxability of Grant Income

The first question for any grant recipient is whether the funds count as taxable income. The rule from the Internal Revenue Service (IRS) is that grants are included in gross income and are therefore taxable. The purpose and use of the funds, however, can alter this tax treatment, as several exceptions can render a grant partially or fully tax-free.

An exception relates to scholarships and fellowship grants for students who are candidates for a degree. Under Section 117 of the Internal Revenue Code, these grants are tax-free if the money is used for qualified education expenses. These expenses are defined as tuition and fees for enrollment, as well as fees, books, supplies, and equipment required for courses. If a portion of the grant is used for other expenses, such as room, board, or travel, that portion becomes taxable income.

For example, if a student receives a $20,000 fellowship grant and uses $15,000 for tuition and required books, that amount is not taxed. The remaining $5,000, if used for living expenses like rent or food, must be reported as gross income. The grant is also taxable if it represents payment for services, such as teaching or research, required as a condition of receiving the award.

Another exception is for disaster relief grants provided under a federally declared disaster, which are excluded from taxable income under Section 139 of the Internal Revenue Code. These payments are intended to help individuals with personal, family, living, or funeral expenses incurred from the disaster. To qualify, the grant must not be a replacement for lost income or a payment for services.

The Grantor’s Reporting Requirements

The organization that awards a grant has responsibilities for reporting the payment to the IRS and the recipient, which may result in a Form 1099. The decision to issue this form is based on the grant’s amount and purpose. A common threshold that triggers this reporting is when payments to an individual in a calendar year total $600 or more.

When a grant is taxable income and not for services, the grantor reports it on Form 1099-MISC, Miscellaneous Information, with the amount shown in Box 3, “Other income.” This form alerts the IRS that an individual received potentially taxable income. This is distinct from Form 1099-NEC, Nonemployee Compensation, which is used for payments for services rendered by an independent contractor.

To issue a Form 1099-MISC, the grantor must have the recipient’s taxpayer identification number (TIN), which is a Social Security Number (SSN) for an individual. The grantor collects this by having the recipient complete an IRS Form W-9 before funds are disbursed. Failure to provide a W-9 can result in backup withholding, where the grantor withholds a percentage of the payment for the IRS.

Not all grants will result in a Form 1099. For instance, the IRS does not require payors to issue a 1099 for most scholarship or fellowship grants. A recipient also may not receive a 1099 if the total amount is less than the $600 reporting threshold for the year.

How Grant Recipients Report Income and Expenses

A grant recipient must report all taxable grant income on their federal tax return, regardless of whether they received a Form 1099. The reporting method depends on the grant’s nature and the recipient’s activities. The two locations for reporting are Schedule C (Form 1040), Profit or Loss from Business, and Schedule 1 (Form 1040), Additional Income and Adjustments to Income.

If the grant is received in connection with a trade or business, it is reported on Schedule C. This is common for artists or researchers who receive grants to support their work. Reporting on Schedule C means the income is subject to self-employment tax, which covers Social Security and Medicare taxes.

The advantage of using Schedule C is that the recipient can deduct business expenses incurred to fulfill the grant’s terms, reducing the net profit and tax owed. For example, a research scientist could deduct laboratory supplies and travel, while an artist might deduct materials and studio rent. Careful documentation of these expenses is needed to substantiate the deductions.

If the grant is not related to the recipient’s trade or business, the taxable portion is reported as “Other Income” on Schedule 1 (Form 1040). This is the case for prizes, awards, or certain taxable scholarships. Income on Schedule 1 is subject to income tax but not self-employment tax. Because this income is not from a business, the recipient cannot deduct related expenses.