How Grant Funds Are Taxed

This guide gives a reliable rule of thumb to individuals or organizations who receive grant funds, including scholarships and fellowships. For definitions and guidance on what is a grant, best practices and creating an entity for grant funding see our article on Grant Funds

When Are Grants Taxable?

Unless the grantee is a public charity organization, grant funds are considered regular income or revenue for the grantee in most cases. There are a few exceptions to this rule, but they are very few and specific. Almost all countries (all relevant countries) have similar rules (IRS Guidance for general reference).

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).

When you file your income tax return:

• On Form 1040 or Form 1040-SR, report the grants received under the “Wages, salaries, tips” line
• On Form 1040-NR, report under the "Scholarship and fellowship grants" line

For 2022 standard individual and corporate tax rates see our Tax Rates Article.

When Are Grant Funds Tax Exempt?

The grantee's legal and tax status generally determines whether grant funds are exempt from income tax. When an organization is tax-exempt (charity status), all funds are exempt from taxes.

• Grants to individuals will almost always be taxable income.
• Grant funds to entities without public charitable status are not tax-exempt.
  • Being a nonprofit does not mean an organization is tax-exempt. Nonprofit is a legal status; tax-exempt is a tax authority status.
• Only charities are tax-exempt (applies to all relevant countries).

For more information on tax rates and tax deductions see our Tax Rate Article.

How Much Tax Should An Individual or Organization Expect to Pay

Tax rates have high variability across regions, individuals, and organizations. Therefore, it is highly challenging to advise what an individual or organization will pay.

• TLDR for individuals; “most likely, whatever rate you paid on your taxes last year is similar to the rate you will pay on these funds.” (Please note that the grant income may change your tax bracket. Always use the advice of an accountant.)
• TLDR for incorporated entities; “If you are not a registered charity, you will likely pay your region’s corporate tax rate on these funds.”

There are ways to defer grant funds to the next year for specific expenditures that have not yet been incurred. But this process should be done under the advice of an accountant; not all expenses may qualify, and the transactions should be documented appropriately.

Tax-Deductible Expenses

Tax-exempt and tax-deductible are sometimes confused. If funds are tax-exempt, then no income tax is paid on those funds. On the other hand, tax deductions reduce the amount of your income that is subject to taxes.

For example, say you receive a grant for $10,000, and you are not a tax-exempt charity. You use the funds for $3,000 of qualified tax deductions (equipment, tuition, etc.). You would pay income tax on the remaining $7,000.

A general rule of thumb; if it is used to do whatever work you are doing (computer, software, textbooks, course materials, tuition, etc.), it is deductible and not taxed. However, if it is to pay for things for yourself (housing, food, cost of living, stipend, etc.), it is taxed.

Using grant funds to pay for tax-deductible expenses and purchases does not affect their tax-deductible status. Not all expenses paid by the grant are automatically tax-deductible. The deductible amount is highly dependent on the grantee's situation; it may be all or none of the funds used.

There are no additional or specific tax deductions related to receiving a grant (no grant-specific tax deductions become available because you received a grant). But there are also no restrictions on what is tax-deductible because of the grant.

• Grant funds are regular income with regular tax-deduction rules.
• Grant funds may be used to pay for the tax-deductible expenses. For example, using grant funds to purchase a computer or textbooks may be tax-deductible. You will want to consult a tax specialist or accountant for what is deductible for your situation.
• Items like living expenses or stipends are generally not deductible.
• Expenses that qualify for tax deduction vary by region (IRS guidance on scholarships for sample reference).

FAQ

• "I'm lining up a grant for $10k, and the grantee is wondering how much tax they would pay on it?”

  • If it goes to an individual, it is regular income on their taxes, and they pay their standard tax rate. (IRS guidance on grants to individuals)
  • Only charities are tax-exempt (applies to all relevant countries).
  • They will be able to deduct some expenses from their taxes. Possibly, for example, equipment or tuition.

• “How are scholarships taxed?”

  • A scholarship is a type of grant and is subject to the same income tax rules as other grants. IRS guidelines
  • Many regions have special tax deductions for educational expenses. In general, to be a tax-exempt educational expense, the institution must be accredited. The expense must be for tuition, fees, books, supplies, and equipment required for courses at the educational institution. Items like housing, living expenses, or stipends are generally not deductible.
  • Most regions have a cap on educational expenses deducted from taxes that range from the equivalent of $2,000 to $5,000 and can be dependent on total income and tax bracket.
    • IRS Educational Tax Credit Programs
    • IRS Tax-Deductible Education Items
  • Most tax authorities treat being in higher education the same as being self-employed. Items like computers or textbooks are the tools you need to run your business (of being a student) and are tax-deductible.

• “Should I set up a legal entity or charity?”

  • A legal entity may be a good fit if you are worried about keeping your grant funds and personal funds separate.
    • A legal entity is not difficult to set up. Many online services will do this for a very economical rate.
    • If you are paying others, a legal entity may be necessary and is often the best option.
  • Setting up a charity can be a long process.
    • Setting up a charity may be a good option if the grant is a significant amount or you believe you will be receiving more funding in the future.
    • The time commitment and cost of setting up and closing down a charity may be too costly for short-term projects.

• “Is the grantor required to report funds sent to the grantee to tax authorities?”

  • Usually, yes. Notification is done based on the country's tax laws where the funder’s legal entity is established.
  • For funds from US entities, most grantees will receive a Form 1099-MISC for any grants equal to or over $600.00; entered into Box 3 for Other income. However, some scholarships and fellowships may instead receive a W-2.
  • Sometimes it may not be a government tax form. Instead, you may receive a letter stating the amount granted to you and that you may be reliable for paying taxes on the amount.

Standard Tax Rates

• TLDR for individuals; “most likely, whatever rate you paid on your taxes last year is the rate you will pay on these funds.”
• TLDR for incorporated entities; “If you are not a registered charity, you will likely pay your region’s corporate tax rate on these funds.”

Individual Income Tax Rates

It is challenging to advise on the percentage the individual will pay in taxes. Most countries (such as the UK, US, Germany, the Netherlands, and France) have a progressive income tax rate. Therefore, the tax rate from one person to the next can vary widely. Some countries have a flat tax rate that varies by the local municipality.

2022 Sample Income Tax Bands For Reference:

Possibly Plus:

Corporate Tax Rates

If the organization is not a charity, grant funds may be subject to corporate tax rates. Most countries have a flat corporate tax rate that can be found with a simple internet search.

2022 Projected Corporate Tax Rates For Reference:

• US 28%
• UK 19% (moving to 25% in 2023)
• France 25%
• New York State 6.5 to 7.25%
• California 8.84%