What Is a Reimbursement Grant and How Does It Work?

A reimbursement grant is a type of funding where an organization first pays for approved project expenses with its own capital. After incurring these costs, the recipient submits proof of payment to the granting agency and is then paid back. This model’s core principle is “spend first, get paid back later,” which differs from grants that provide cash upfront.

This structure requires the recipient organization to have sufficient cash flow or a line of credit to cover expenses for potentially extended periods. The delay between spending and receiving reimbursement can be significant, making an understanding of this financial float necessary for managing the award.

Identifying Eligible Expenses and Required Documentation

Before spending any funds, you must understand which costs the grant will cover. Grant agreements explicitly define eligible expenses, which include direct project costs such as:

• Personnel salaries
• Specialized equipment
• Project-specific travel
• Necessary supplies

The guidelines will also detail ineligible costs, such as entertainment or lobbying activities. Spending money on an unapproved item will result in that expense being denied for reimbursement.

Meticulous documentation is required to prove every expenditure. For personnel costs, this means maintaining signed timesheets that detail the dates, hours, tasks, and pay rate, supported by corresponding payroll records. When purchasing equipment or supplies, the granting agency requires a complete, dated invoice from the vendor and proof of payment, such as a canceled check or a credit card statement.

These documents must be from a third party, as internal records alone are not sufficient proof. The documentation must connect the expense to the approved grant project and budget. If spending will differ from the approved budget, an organization must get approval from the granting agency before incurring the new expenses. Failure to maintain detailed, organized records is the most common reason reimbursement requests are delayed or denied.

The Grant Application Process

The process begins by identifying grant opportunities through government portals or foundations. Once a potential grant is found, the next step is to carefully review the Request for Proposal (RFP). This document contains all the rules, eligibility requirements, project objectives, and submission deadlines.

The application package includes the project narrative and the budget. The narrative explains the project’s goals, activities, and expected outcomes. The budget requires a detailed breakdown of all anticipated project costs, which becomes the foundation for which expenses will be eligible for reimbursement.

After compiling all components according to the RFP’s instructions, the organization submits the complete package through the grantor’s specified method, which is often an online portal. The grantor then reviews all applications, a process that can take several months, before announcing the award recipients.

Submitting a Reimbursement Claim

After approved expenses have been paid, the recipient requests payment by assembling all required documentation into a formal request package. Granting agencies provide specific forms to summarize the expenses, requiring a list of each expense, its date, amount, and a reference to the corresponding budget line item.

The package is submitted to the grantor through its specified method, such as an online portal or by mail. For federal awards, regulations require that records be kept for three years after the final report is submitted, though this period can be extended if an audit or litigation arises.

The grantor’s staff will review the request, comparing each claimed expense against the approved budget and supporting documentation. This review process can take anywhere from a few weeks to several months. If any discrepancies are found, the grantor will contact the recipient for clarification. Once the request is approved, payment is processed and sent to the recipient as a direct deposit or check.

Tax Reporting for Grant Funds

Receiving grant funds has tax implications that differ by organization type. For-profit businesses must report grant money as taxable income. The funds are included in the company’s gross income for the tax year in which they are received, while the project expenses paid by the organization are tax-deductible. This creates a balancing effect that can minimize the net tax liability.

For a 501(c)(3) nonprofit organization, a grant is not considered taxable income as long as the funds are used to further its tax-exempt mission. While the grant is recorded as revenue for accounting purposes, it is not subject to federal income tax.

The tax treatment for grants awarded directly to individuals can differ, particularly for scholarships. Because tax rules are complex and vary based on the recipient’s entity type and the grant’s nature, consulting with a tax professional is advisable. A professional can provide guidance on proper reporting to ensure compliance with both federal and state tax laws.