Who is this article for?
For individuals or organizations who receive grant funds, including scholarships and fellowships.
Be aware that much of the information in this article uses US rules as examples. Many countries have similar rules and regulations, but individuals and organizations should always seek advice from a certified accountant on properly handling any funding.
This information covers grants from foundations, organizations, and individuals. Much of this does not apply to government-issued grants, which may have exceptions and rules.
Topics Covered in This Article:
- What is a Grant?
- Receiving Grant Funds
- When are Grants Taxable?
- Creating an Entity for Grant Funding
- Best Practices
What is a Grant?
Grants are generally given without the awarding body expecting anything in return. Therefore, the payor should have no financial or other benefits concerning the grant or scholarship.
Grants are usually given by:
- Government
- A Public foundation or company
- A Private foundation or company
US IRS Definition of a Grant
For reference or as an example, grants are defined by the IRS as the following:
Grants include the following types of expenditures:
- Scholarships, fellowships, internships, prizes, and awards
- Loans for charitable purposes
- Program related investments
- Payments to exempt organizations to further the organizations' exempt purposes
Grants do not ordinarily include the following types of expenditures:
- Salaries or compensation to employees
- Payments to persons for personal services in helping a foundation plan, evaluate, or develop projects or areas of program activity by consulting, advising, or participating on conferences organized by the foundation.
Receiving Grant Funds
Foundations, funders, and sponsors prefer to give grants to nonprofits or those with charity status (such as a 501(c)(3) designation in the US or an organization registered with the Charity Commission in the UK.), which is why fewer individual or personal grants are given. A nonprofit or organization with charity status looks more reputable due to its structure and need to adhere to certain guidelines and laws.
However, do not be discouraged; grants are still given to individuals. See our article receiving grant funds for more information on individual grants and best practices for both individuals and nonprofits.
When Are Grants Taxable?
Unless the grantee (person or organization receiving the grant) is a public charity organization, grant funds are considered regular income or revenue for the grantee in most cases. Therefore, these types of grants (regarded as wages) will follow the typical income tax rates you have been paying as an individual.
Grant money becomes taxable income if:
- it is used for incidental expenses or paid directly as a stipend, compensation, or payment for teaching, research, or other services required as a condition of receiving the scholarship.
- it is awarded by an employer unless it is proven to be employer-provided training (further studies for maintaining professional competence).
This rule has a few exceptions, but they are limited and specific. Most countries have similar rules; see the IRS Guidance for general reference.
For more information on how grant funds are taxed, when they are tax exempt, and how to file. See our article on How Grant Funds Are Taxed.
Creating an Entity for Grant Funding
A grant is not subject to tax if it is paid to an organization with a charity or tax-exempt status. However, keep in mind that not all nonprofits have this status. In the US, this is also the case when a grant is paid to a 501(c)(3) as a fiscal sponsor.
If a grant is awarded to an incorporated entity (i.e., LLC) or an unincorporated association, it becomes taxable.
Review our article on applying for charity status and our guides on how to start a nonprofit in the US and the UK for further guidance.
Best Practices
- It’s important to have an accounting policy in place for grants, including a method of balance sheet presentation.
- There needs to be a sound financial system so grant funds are not mingled with other nonprofit or personal funds.
- Start the acquittal process as soon as the grant is received. This will help create a report that shows the funds were used for their intended purpose.
- The nature and extent of grants must be detailed in the report and financial statements.
- Unfulfilled conditions and contingencies attached to recognized grants should also be disclosed.