Unique Taxation of Government Grants Given During the Pandemic

If you are self-employed and run a sole proprietorship that received government grants during the pandemic, you may be surprised at the taxation.

Generally, government grants to businesses are considered as income which requires the business to report and pay tax on the amount received. Under the CARES Act, grants are no different. If a business is run as a sole proprietorship, then the income received from the grant would be reported on the Schedule C and taxed if not offset by other expenses. The same rule is followed if the grant were provided to self-employed individuals reporting their tax liability on their personal returns, with the added caveat that any amount leftover which was not used to offset business expenses is subject to self-employment taxation. This is the case at both the federal and California levels.  Therefore, there is usually no harm from the grant, but you must adhere to proper reporting and not just net the grant and expenses and report nothing.

Additionally, cancelled loans designated under the CARES Act differ from traditional cancellation of debt income taxation measures. Generally, when a business receives a loan, the amount of the loan is untaxed. If the debt is later canceled, the business must pay tax on the value of the canceled loan. Under the CARES Act, certain government loans issued after January 1, 2019, will not have their loan values taxed as a result of cancelation if the loan was properly utilized. Since many of the loan programs required the funds be used for specific business expenses, most income received will remain untaxed due to the wash from the qualified business expenses. However, any income from the loan after deducting the qualified expenses is subject to tax. In the case of a self-employed individual, this means the difference is subject to self-employment tax.

Overall, grants and loans are only a portion of tax law’s impact on business practices. If you believe your business might be impacted, a full review by a tax professional is highly recommended.


Disclaimer: Hone Maxwell LLP articles and blogs are not intended as legal advice. Additional facts, facts specific to your situation or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.

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