Is the $10,000 EIDL Grant Taxable?

The Economic Injury Disaster Loan (EIDL) Advance program was a component of the federal government’s COVID-19 relief efforts, designed to provide rapid financial support to small businesses experiencing temporary revenue losses. These funds, often referred to as grants and distinct from the larger, repayable EIDL loans, were distributed in varying amounts, with a frequently cited maximum of $10,000. The introduction of this relief created immediate questions for recipients regarding their tax obligations, as the taxability of such a widespread government payment was not initially clear. This article addresses the tax treatment of the EIDL grant.

Federal Tax Treatment of the EIDL Grant

For federal tax purposes, the EIDL grant is not considered taxable income. Business owners who received these funds do not need to report them as part of their gross income on their federal tax returns. This tax treatment was specifically established by Congress to maximize the benefit of the relief funds for struggling businesses.

The initial legislation, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, introduced the program, but further clarification was needed. This came with the passage of the Consolidated Appropriations Act, 2021, which explicitly stated that EIDL grants were to be excluded from gross income.

Deductibility of Related Business Expenses

An aspect of the EIDL grant’s tax treatment is the handling of business expenses paid for with the funds. The same legislation that made the grant non-taxable also affirmed that recipients could fully deduct the ordinary and necessary business expenses paid for with that money. This means that costs such as payroll, rent, and utilities remain deductible on a business’s tax return, even if covered by the tax-free grant funds.

This provision prevents an indirect tax on the relief money. Had the Internal Revenue Service (IRS) disallowed these deductions, it would have increased a business’s taxable income by an amount equivalent to the expenses paid. This would have effectively negated the tax-free status of the grant.

State-Level Tax Considerations

While the federal government clarified its position, the tax treatment of EIDL grants at the state level is more complex. State tax laws do not always automatically align with federal tax code changes. This concept, known as “tax conformity,” determines whether a state adopts federal tax rules as they are enacted or if it requires separate state-level legislation to do so.

Because of this, the taxability of an EIDL grant can vary significantly from one state to another. In states that conform to the federal treatment, the grant is also non-taxable. However, in states that do not conform or that have specific rules carving out this type of income, the grant money may be considered taxable income for state tax purposes. Business owners must consult their state’s department of revenue or a tax professional to understand their obligations, as assuming the federal rule applies at the state level can lead to incorrect filings.

Correcting a Previously Filed Tax Return

Some business owners may have filed their federal tax returns before the final guidance on the EIDL grant’s tax-free status was issued, incorrectly including the grant as taxable income. It is possible to correct this error and claim a refund for the overpaid tax by filing an amended tax return with the IRS. The specific form required for this action is Form 1040-X, Amended U.S. Individual Income Tax Return, for sole proprietors and other individuals who report business income on their personal returns. The form allows a taxpayer to report the corrected income figures, calculate the resulting change in tax, and claim any refund due.