Grants: Is This Taxable Income?

While grants are a great source of additional income for deserving individuals and businesses, it is important to realize that by and large these are in fact taxable money donations. This means that individuals and businesses and organizations receiving a grant, unless covered under the limited exceptions listed by the IRS below (such as an educational grant), must pay taxes on the money received.

Thus, the money received in a grant that is not considered tax-free, must be added to your gross yearly income, to which your taxes are calculated. Unfortunately because of the variance in personal income it is difficult to give an accurate estimate of how much tax you will pay on your grant. In fact, with so many factors taken into consideration in income taxes, it is very unlikely that any two people, even with the same salary, would pay the same tax.

As such it is a good idea to contact an accountant on this matter before spending the grant in its entirety, as you will probably need to set aside a projected amount to cover the taxes at the end of the year.

To find out if your grant is one of the few that is exempt from taxes read below on the information gathered from the IRS website.

According to the IRS at http://www.irs.gov/charities/foundations/article/0,,id=137396,00.html:

“Grants to individuals for travel, study, or other similar purposes (including loans made for charitable purposes, and program-related investments) are taxable expenditures, unless the following conditions are met:

1. The grant must be awarded on an objective and non-discriminatory basis under a procedure approved in advance by the Service, and
2. It must be shown to the satisfaction of the Service that one of the following requirements is met–
   1. The grant is a scholarship or fellowship and is to be used for study at an educational institution that normally maintains a regular faculty and curriculum and normally has a regularly organized body of students in attendance at the place where the educational activities are carried on. For these purposes, there is no requirement that the grant recipients be limited to degree candidates, nor must the grant be limited to tuition, fees, and course-required books, supplies, and equipment. A recipient may use grant funds for room, board, travel, research, clerical help, or equipment, that are incidental to the purposes of the scholarship or fellowship grant.
   2. The grant qualifies as a prize or award that is excluded from gross income under Internal Revenue Code section 74(b), if the recipient is selected from the general public. For this purpose, the recipient may keep the prize or award, and need not authorize the foundation to transfer the prize or award to a governmental unit or to another charity.
   3. The grant’s purpose is to achieve a specific objective, produce a report or similar product, or improve or enhance a literary, artistic, musical, scientific, teaching, or similar capacity, skill, or talent of the grantee.”