Does My Business Have to Pay Taxes on a Debt Relief Grant?
The Basics of Debt Relief Grants
First, let’s review what debt relief grants are. These grants are funds provided by the government, nonprofits, or other organizations to help businesses pay off or reduce outstanding debt. The grants are intended to provide financial assistance and relief, especially for small businesses struggling due to the pandemic or other economic factors.
Some common types of debt relief grants include:
-- SBA Debt Relief Program – provides financial assistance to 7(a), 504, and microloan borrowers to make principal, interest, and fee payments for six months.
- State and local business grant programs – offered in many states and cities to support local businesses.
- Nonprofit and corporate grant programs – funds provided by foundations, corporations, and other private institutions.
- Targeted industry grant programs – for businesses in particularly hard-hit industries like restaurants, live entertainment, etc.
Are Debt Relief Grants Considered Taxable Income?
In most cases, debt relief grants are considered taxable income by the IRS. According to the IRS, “The receipt of a government grant by a business generally is not excluded from the business’s gross income under the Code.”
There are some limited exceptions where a debt relief grant may not be taxed:
- Grants used for employee retention – The CARES Act allowed some grants used specifically to retain employees to be excluded from taxable income.
- Specific disaster relief grants – Some grants related to specific disaster relief efforts may be nontaxable.
- Grants from tax-exempt organizations – Grants provided by tax-exempt nonprofits and foundations may not be taxable in some cases.
However, the vast majority of debt relief grants awarded to businesses do not fall into these categories. So it’s safest to assume that any amount of debt forgiven through a grant will be treated as taxable income.
How Debt Relief Grants Are Taxed
If your business receives a $10,000 grant that is used to pay off $10,000 of outstanding debt, you will owe income taxes on the full $10,000 grant amount. This applies even though the grant funds did not actually end up in your bank account.
-Essentially, the $10,000 of forgiven debt gets added to your gross income for the year. How much tax you’ll owe depends on your business’s tax bracket. Sole proprietors would pay based on personal income tax rates, while corporations would pay corporate income tax rates.