Are Grants Actually Taxable? Avoid this Mistake + FAQs

Yes – certain grants are considered taxable income in the U.S., depending on the type of grant and how you use the funds.

Over $150 billion in grants and scholarships are awarded to U.S. students each year, and countless small businesses receive grant money – but many recipients are shocked at tax time to learn the IRS wants a share of their “free” money.

In this article, you will learn:

• The direct answer to whether grants are taxable income in the U.S. (immediately clarified)

• Common pitfalls and misconceptions about “tax-free” grant money to avoid costly mistakes

• Key terms & entities (IRS rules, FAFSA, SBA, 501(c)(3), Pell Grants, etc.) that impact grant taxation

• Tax treatment of different grant types: educational scholarships, business/startup grants, nonprofit grants, government aid, personal and research grants

• Examples and scenarios illustrating when grant money is tax-free vs. taxable (with a handy breakdown table)

• Comparisons of grants vs. scholarships, gifts, prizes, and loans, and how each is taxed

• Legal evidence & IRS guidance (court cases, tax code, forms like 1099-G/1098-T) explaining the rules

• Federal vs. state tax nuances for grants, including special cases (like COVID-19 relief grants)

• FAQs from real people about grant taxation (with quick yes/no answers to common questions)

Let’s dive in and demystify the tax implications of grants so you can enjoy your award without unintended consequences.

Direct Answer: When Are Grants Taxable Income?

Grants can be taxable income under U.S. tax law, but it depends on the grant’s purpose and recipient. The Internal Revenue Service (IRS) generally treats any monetary grant or award as part of your gross income (which is subject to income tax) unless a specific exclusion applies.

If you receive money that you don’t have to pay back, the default assumption is it’s taxable. However, there are key exceptions where grant money can be tax-free (non-taxable) — most notably qualified education grants (scholarships used for tuition), certain disaster relief or welfare grants, and funds given to tax-exempt nonprofits.

To clarify the landscape, here’s a quick overview of common grant types and their tax status:

As the table shows, whether a grant is taxable hinges on factors like: what the money is used for, your role (student, business owner, etc.), and any strings attached. We’ll explore each scenario in depth. But the bottom line is: Before you celebrate that grant as “free money,” check if the IRS might consider it taxable income. In the next sections, we break down common scenarios, pitfalls, and rules so you know exactly where you stand.

Common Pitfalls and Misconceptions (🚩 to Avoid)

Even savvy folks can stumble into tax trouble with grants. Here are some common pitfalls and misconceptions about grant money and taxes – watch out for these red flags to avoid owing more tax or penalties:

• Assuming “Free Money” Is Always Tax-Free: One of the biggest mistakes is thinking grants, scholarships, or stipends don’t count as income. Reality check: The IRS taxes most types of income, even well-intentioned gifts or awards, unless an exception applies. Don’t assume that just because it’s called a grant (or came from a government or charity) that it’s automatically tax-free. Always verify the tax status.

• Not Tracking How Grant Money Is Used: For students, this is critical. If you receive a lump sum education grant and spend part of it on non-qualified expenses (like off-campus rent or meals), that portion becomes taxable. A common pitfall is failing to track how every dollar was used. Solution: Keep records or separate accounts for qualified expenses vs. personal expenses. Only the qualified part can remain tax-free.

• Ignoring Tax Forms (or Lack Thereof): Some grants won’t come with a clear tax form, which misleads recipients. For instance, universities might not issue a tax form for a taxable scholarship portion – it’s on you to report it.

• Similarly, a government agency might send you a Form 1099-G for a grant or 1098-T (Tuition Statement) for college payments. Don’t ignore these! They are clues to what the IRS knows. Conversely, even if you don’t get a form (say you got a foundation grant with no 1099), that doesn’t mean it’s tax-free. You may still need to declare it as income.

• Forgetting Estimated Taxes: Grants often don’t have tax withholding. If you’re a grad student receiving a taxable stipend or a small business owner with a grant, you might need to pay estimated taxes quarterly. A pitfall is happily spending the money and then facing a big tax bill in April. Avoid surprises by setting aside a portion for taxes or making estimated tax payments throughout the year on taxable grant income.

• Mixing Up Grants vs. Loans or Gifts: People sometimes treat a grant like a loan (which isn’t taxed) or a personal gift. Be careful with definitions: A loan you must repay is generally not taxable (unless forgiven), whereas a grant you keep usually is taxable unless exempt. A gift from a family member or friend isn’t taxable to you, but grants typically come from institutions or programs with specific purposes – those typically fall under income unless structured as a true gift. Misidentifying what you got can lead to incorrectly not reporting income.

• Using “Grant” Money Outside Its Intended Purpose: Some grants are tax-free only if used in certain ways. For example, disaster relief funds must be used for necessary expenses caused by the disaster; educational grants must go to tuition or school costs. Spending the money on something outside the allowed purpose might not only violate the grant’s terms, but also potentially make it taxable (or even require you to pay it back). Stick to the intended use or consult a tax advisor if you need to deviate.

By understanding these common traps, you can handle your grant responsibly. Next, let’s clarify some key terms and concepts that will make the detailed scenarios easier to follow.

Key Terms & Concepts Defined

Before we dive deeper, let’s define a few key terms and entities related to grants and taxes. Knowing these will help you grasp why some grants are taxed and others aren’t:

• Grant: In general, a grant is a sum of money given for a particular purpose, with no obligation to repay. Grants can come from governments, foundations, corporations, or schools. They often aim to support education, research, businesses, or community programs. Importantly, grants are not loans (loans must be repaid) and not exactly income from work (though some grants require work). Tax-wise, the IRS usually treats a grant as income unless it fits specific exceptions (like a qualified scholarship or gift).

• Scholarship/Fellowship: These are types of educational grants. A scholarship typically refers to merit-based aid for students (e.g. academic or athletic scholarship), and a fellowship often refers to funding for graduate students or researchers (sometimes as a stipend). For tax purposes, scholarships and fellowships follow the same rules as grants – they can be tax-free if used for qualified education costs by a degree student (more on “qualified education expenses” below). If used otherwise, they become taxable. Often, Pell Grants (a federal need-based grant for undergrads) and other student aid fall in this category.

• Qualified Education Expenses: This term is crucial for determining if a scholarship/grant is taxable. The IRS defines qualified education expenses (for tax-free scholarships) as tuition and required fees, books, supplies, and equipment that you must purchase for your courses at an eligible educational institution. In plain language: the necessary costs of your education. Not included: room and board, travel, optional equipment, or any expense not required for enrollment. If grant money covers only qualified expenses for a degree student, that portion is excluded from taxable income. Any amount beyond those (like a stipend for living expenses) is taxable.

• Gross Income: This is a broad tax term meaning all income you receive in a year that isn’t specifically exempt. The U.S. tax system starts with the assumption that everything is gross income – wages, interest, prizes, and yes, grants – unless a law says otherwise. So, a grant is part of your gross income by default. Exclusions are specific carve-outs (like the exclusion for qualified scholarships, or for disaster relief payments). If an exclusion applies, that amount is not counted in gross income or taxed.

• IRS (Internal Revenue Service): The U.S. federal tax authority. We’ll mention the IRS often, since they set and enforce the tax rules. The IRS provides guidance like Publication 970 (Tax Benefits for Education) which explains scholarships, and it issues forms like Form 1099-G (“Certain Government Payments”) which reports taxable government grants, or Form 1098-T which colleges send to show how much tuition was billed and how much scholarship was received. The IRS is also behind key tax code sections (like IRC §117 for scholarships, §61 for gross income, §139 for disaster relief) that govern grant taxation. When in doubt, checking IRS guidelines for your specific grant type is wise.

• FAFSA (Free Application for Federal Student Aid): While FAFSA itself is not a tax concept, it’s the form students fill out to get federal financial aid for college. Why mention it in a tax discussion? Because the FAFSA considers your income (from two years prior) to determine aid. If you had a taxable scholarship or grant in a prior year, it could raise your income and potentially reduce your need-based aid in a future year. Also, the FAFSA’s calculations don’t subtract out the taxes you paid on that scholarship, which can feel unfair (you got less aid because you had a scholarship that partly went to taxes). The key point: taxable grant income can affect financial aid eligibility later. Keep this in mind if you’re a student balancing scholarships and aid.

• SBA (Small Business Administration): An agency of the federal government that, among other things, administers grants and loans to small businesses. The SBA is relevant because many business owners think of SBA programs when they hear “grant” – for example, the Paycheck Protection Program (PPP) loans or Shuttered Venue grants during COVID-19. The SBA also oversees disaster loans (some with forgivable advances). We’ll discuss how some of these were special cases (PPP loan forgiveness was explicitly made non-taxable by legislation). Normally, an SBA grant or any government grant to a business counts as taxable income to that business unless stated otherwise.

• 501(c)(3): This refers to the section of the Internal Revenue Code that designates tax-exempt charitable organizations. If an organization has 501(c)(3) status (like many nonprofits, charities, universities), it generally does not pay federal income tax on money it receives for its charitable purpose – including grants and donations. This is why grants given to a legitimate nonprofit aren’t taxable income (the nonprofit might have to use the funds as promised and report them on a Form 990 informational return, but it doesn’t cut a tax check on that grant). For our purposes, remember that if you are running a project and you receive a grant as a 501(c)(3) entity, the money isn’t taxed – whereas if you received the same money personally or as a for-profit business, it likely would be.

• Taxable vs. Tax-Free (Non-taxable): We’ll use these terms frequently. Taxable means you must include the amount in your income and it could increase your tax bill. Tax-free (or nontaxable/excludable) means you don’t owe tax on that money. Some grants are fully tax-free, some are partially tax-free, and some are fully taxable. Context matters, as we’ll see in the scenarios.

• 1099-G, 1099-MISC, W-2, etc.: These are IRS information forms that third parties send you (and the IRS) to report various payments. A quick rundown: 1099-G is typically sent by government agencies for things like taxable grants or unemployment benefits (it has a box 6 for “taxable grants”). 1099-MISC or 1099-NEC might be sent by a foundation or company if they gave you a grant/prize (for example, a cash award might come on a 1099-MISC, historically in box 3 “other income”). A W-2 is for wages – if your “grant” was actually payment for a job (like a teaching assistant stipend), you’ll get a W-2. However, lack of a form does not mean lack of tax – some smaller grants may not trigger a form, but you still have a legal duty to report the income.

Now that we’ve clarified these terms and players, let’s explore specific scenarios by grant type – covering educational grants, business grants, nonprofit grants, government/personal grants, and research grants – with examples for each.

Educational Grants & Scholarships: When Are They Taxable?

Education grants and scholarships are one of the most common grants individuals receive. The good news is that money for school can often be tax-free, but there are important conditions and caveats. Here’s how it works:

Qualified Scholarships (Tax-Free): If you’re a degree-seeking student at an eligible institution (college, university, etc.), any scholarship or grant used for qualified education expenses is excluded from taxable income. This typically covers tuition, mandatory fees, and required course materials. For example, a Pell Grant or university scholarship that goes directly toward your tuition bill is tax-free. You won’t owe taxes on that portion, and it won’t show up as taxable on your return.

Taxable Scholarship Portion: Problems arise when scholarship or grant money exceeds your qualifying expenses or is used for other costs:

• Room and Board: The biggest culprit. Grants that pay for your dorm room, off-campus rent, meal plans, or groceries are taxable. The IRS explicitly states that funds for room and board are not qualified education expenses. So if you get a $10,000 scholarship and your tuition is only $8,000, and you apply the remaining $2,000 to housing, that $2,000 must be counted as income on your tax return.

• Travel & Miscellaneous: If your scholarship covers travel to a conference, or you get a stipend for personal expenses, those portions are taxable as well.

• Non-Degree Students: If you receive a grant or scholarship and you’re not pursuing a degree (say, you’re taking classes for a certificate or you’re an international Fulbright student not in a degree program), the entire scholarship can be taxable. U.S. tax law generally only allows the tax-free treatment for degree candidates. (One caveat: certain specific programs, like some need-based grants or prizes, might have special rules, but the default is degree = required for tax-free scholarship.)

Example: Jane is an undergraduate who received a $5,000 Pell Grant and a $5,000 merit scholarship from her college. That’s $10,000 of total aid. Her tuition and required fees for the year are $8,000. She uses the remaining $2,000 to pay for her dorm room. Result: $8,000 of her aid is tax-free (matched to tuition/fees), and $2,000 is taxable income. Jane should report that $2,000 on her tax return. The school will send her a Form 1098-T showing $8,000 in tuition billed and $10,000 in scholarships/grants. The form itself doesn’t tell the IRS what’s taxable, but it’s a tool for Jane to determine that $2k difference. (If Jane had used all $10k for tuition and required expenses, none of it would be taxable.)

Work-Conditioned Grants (Taxable): Some students receive tuition waivers or grants in exchange for teaching or research work – for instance, a graduate teaching assistant gets tuition covered but must teach sections, or a medical student gets a stipend but must work in a certain under-served area after graduation. Typically, if services are required as a condition of the grant, the funds are treated as payment for work (essentially, wages). That means they are taxable and usually subject to payroll taxes too. They might be reported on a W-2 or a 1099. The IRS doesn’t allow you to double-dip by saying “it’s a scholarship” if you had to work for it (with some narrow exceptions for specific federal programs).

Athletic Scholarships: Many athletic scholarships cover tuition (tax-free) plus room and board (technically taxable). In practice, universities don’t issue W-2s to athletes for the free dorm and meals, but the tax code says that portion is income. It’s a quirky situation – often student-athletes may not report it, but by law it is taxable. (We mention this to be thorough; consult a tax professional if you’re in this scenario, as enforcement can be a gray area.)

Reporting: If you have a taxable portion of a scholarship, how do you report it? It usually goes on the “Other income” line of Form 1040 (Schedule 1). If it was for services (like a stipend for teaching), it may instead come on a W-2 and be reported as wage income. You typically do not pay Social Security/Medicare tax on a scholarship, unless it’s explicitly for services (in which case it’s just like a job). No matter what, the onus is on you to report it even if no one sends you a clear tax form for that portion.

Financial Aid Impact: As noted, if you have a taxable scholarship portion, it increases your income. For a dependent student, it could mean your parents pay slightly more tax. For an independent student, it could mean you pay some tax (though often students have low income, so the tax might be minimal). However, the bigger impact might be on next year’s FAFSA: that taxable scholarship gets included in your Adjusted Gross Income (AGI), which could reduce need-based aid next year. On the FAFSA form, there is actually a question asking if you had any taxable college grant/scholarship income (to possibly exclude it from certain calculations), but it’s a bit confusing. Just be aware that a large taxable scholarship in one year can echo into aid eligibility.

To summarize education grants: Use them for tuition and required costs – tax free. Use them for anything else – taxable. Plan accordingly: if you have control, you might apply scholarship funds to tuition first, or prepay future tuition, to maximize tax-free usage. Next, we’ll examine grants for research and academia, which overlap with education but have their own wrinkles.

Research Grants & Fellowships: Taxation in Academia

Research grants often blur the line between educational and business grants. The tax treatment can depend on who receives the grant and how it’s structured. Let’s break down a few common academic research funding scenarios:

• Graduate Student Fellowships: Many grad students and postdoctoral researchers receive fellowship grants or stipends to support their work. If you’re a grad student and the fellowship is effectively support for living while you study or research, it’s treated similarly to a scholarship. That means: if you’re using it for tuition (e.g., some PhD programs have external fellowships paying your tuition and a stipend), the tuition part is tax-free but the stipend you live on is taxable. Typically, you won’t get a W-2 for a fellowship stipend with no work obligations; the university might give you a courtesy letter or just include it on your 1098-T or a fellowship statement. You still must report it as taxable scholarship/fellowship income. Example: John is a PhD candidate with an NSF Graduate Research Fellowship. It provides a $34,000 annual stipend paid to him and covers his tuition. The tuition coverage is tax-exempt; the $34k stipend is taxable. John should be paying estimated taxes on that or have withholding via his school’s payroll (some universities let fellows opt into tax withholding).

• Assistantships (Service Required): If you’re a research assistant or teaching assistant where you perform work (teach classes, work in a lab for the university), the money you receive is usually processed through payroll as a salary or wage. So even though it’s related to your education, it’s taxed like any job income (and you’ll get a W-2). Often, such students also get a tuition reduction – the tuition reduction might be tax-free under a specific exemption for teaching/research assistants (there are carve-outs in the tax code so that the tuition waiver isn’t counted as income, as long as you’re a degree student at that school). But the stipend for the work is taxed. In short, if you’re being paid to do something, it’s not a tax-free grant, it’s a job.

• Research Grants to Professors/Universities: Now consider a research grant from, say, the National Institutes of Health (NIH) or National Science Foundation (NSF) to a university for a project. Typically, the grant is awarded to the institution, not directly to the researcher personally. The university might pay the professor and lab staff salaries out of it, buy equipment, etc. You, as the researcher, are not personally taxed on the grant funds – they belong to the university. You’re only taxed on any salary or consulting fees you earn from it. The university as a 501(c)(3) doesn’t pay tax on the grant either. So in this scenario, the grant itself isn’t taxed, only the downstream payments (wages, contractor payments) are.

• Research Grants to Individuals: Occasionally, a grantor might give a research grant directly to an individual researcher not affiliated with an institution. For example, a private foundation might give an independent scholar a $50,000 grant to research and write a book. If you receive such funds personally, the IRS will usually see that as taxable income. It may be considered self-employment income if it’s effectively paying you to perform research services, or it might be “other income.” Either way, unless you can argue it’s a prize or fellowship that meets specific exclusion criteria (rare), you’ll owe tax on it. You might be able to deduct research expenses you spend that money on, but the grant itself is income. Case in point: The prestigious MacArthur Fellowship (nicknamed the “Genius Grant,” a no-strings-attached award of $625,000 over five years to extraordinarily creative individuals) – despite being called a fellowship, it’s actually an award and fully taxable. Recipients have to pay income tax on those funds (and many hire accountants for such windfalls).

• Prizes and Awards in Academia: If a researcher or student wins an award (say, a $10,000 award for best dissertation or a breakthrough prize), that’s taxable prize income. One exception: If the award qualifies under a special rule in IRC Section 74(b) – meaning you were selected without entering and you immediately give the prize money to charity/government – you could exclude it. But that’s uncommon. Generally, any cash award ends up taxable even if it’s labeled a grant.

Tax Forms and Reporting for Research Funds: If you’re a student or postdoc with a stipend, you might not get a formal tax form. You’ll need to report the income yourself. If you’re on payroll as an RA/TA, you’ll get a W-2. For prizes or foundation grants, you might receive a 1099-MISC (Box 3 “Other Income”) or a 1099-NEC if they consider you an independent contractor performing research services. Always report these earnings and consult a tax advisor for any eligible deductions (for example, maybe you spent personal money on research supplies – in limited cases, some of that might be deductible against fellowship income, though tax law changes in 2018 limited unreimbursed expense deductions for individuals).

International Students/Researchers: Briefly worth noting – if you’re an international student in the U.S. on a scholarship or stipend, tax might be withheld at a flat 14% on your stipend unless a tax treaty applies. And if you’re a U.S. citizen doing research abroad on a grant, you don’t get to exclude it as “foreign earned income” if it’s a grant/fellowship (the foreign earned income exclusion is for wages/business income earned abroad, not applicable to scholarship/fellowship income). So you still pay U.S. tax on it generally.

Bottom line: In academia, know which bucket your funding falls into – scholarship (tuition vs living), stipend with no duties, or pay for work. That determines if it’s taxed. When in doubt, assume it’s taxable and then seek any available exclusions, rather than assuming it’s free of tax. Next, let’s move out of the school setting and into the world of entrepreneurs and businesses.

Business and Startup Grants: Does the IRS Want a Share?

If you’re a business owner or entrepreneur, you might have pursued grants to kickstart or support your venture – for example, a small business grant from a city program, an SBA (Small Business Administration) grant, or even grant competitions run by companies or nonprofits. The general rule for businesses is straightforward: business grants are usually taxable income for the business. Here’s what you need to know:

Grants = Income: The IRS considers most grants to a business as part of the business’s gross income (just like sales revenue). Why? Because it’s money the business received that isn’t a loan. Whether the grant is used for marketing, equipment, or payroll doesn’t change the initial characterization – you got money, so it’s income. For instance, if a local economic development council gives your startup a $20,000 grant to create jobs, that $20k will be added to your business’s income for the year.

Taxable, But Deductions Apply: Receiving a grant doesn’t mean you lose out overall. Remember: if you spend that grant on business expenses (which you likely are required to, as per the grant terms), those expenses are deductible. So, in many cases, the grant increases your income, but you have matching deductions, resulting in little to no increase in taxable profit. Example: Your company gets a $50,000 grant to develop a new product. You spend $50,000 on R&D costs and employee salaries related to that project. The $50k is income, but the $50k of costs are deductions – essentially netting out. You’d still report both the income and expenses on the tax return, which is important for transparency and because not all timing matches perfectly (if you get the money one year but spend it the next, your tax returns would show income in one year and expenses in another, which can matter).

Exceptions – Special Tax-Free Grants: Occasionally, the government may provide that a certain business grant is tax-exempt. The recent pandemic relief programs are prime examples:

• PPP (Paycheck Protection Program) Loans: These were technically loans, but if you met conditions, the loan was forgiven – turning it into a de facto grant. Normally, canceled debt is taxable income. However, Congress explicitly excluded PPP forgiveness from income and allowed businesses to still deduct the expenses paid with PPP funds. That was an extraordinary exception. So PPP funds that are forgiven are not taxable federally. (Be careful: at first a few states taxed PPP forgiveness or disallowed deductions, but most aligned with federal rules eventually.)

• EIDL Advances: The SBA’s Economic Injury Disaster Loan program offered up to $10,000 “advances” that were essentially grants (you didn’t have to repay even if you were denied the loan). Those, too, were exempted from tax by legislation.

• Shuttered Venue Operators Grants (SVOG) and Restaurant Revitalization Fund (RRF): These COVID-era grants to theaters and restaurants were also specifically made non-taxable by law for federal tax.

• If you happen to get a grant under a law that says “this grant is not taxable,” then you follow that. (Typically the program’s FAQ or award letter will mention if it’s tax-exempt.) These are relatively rare outside of disaster contexts.

Apart from special laws, assume grants are taxable. For example:

• State/Local Grants: If your city gives you a grant to spruce up your storefront or your state gives a grant for adopting solar panels at your business, the IRS expects you to include that in income. Government agencies issue Form 1099-G for “Certain Government Payments” – Box 6 of that form reports “Taxable grants.” If you get one of those forms, it’s a clear sign it’s taxable (and the IRS got a copy). Even if you don’t get a form because the amount was small or they didn’t issue it, you should still report it.

• Private Grants or Awards: Winning a grant from a private competition (say a pitch contest, or a grant from a corporation or foundation for your business) will likely result in a 1099-MISC sent to your business (or you, if you’re a sole proprietor). Box 3 (Other Income) is a common place they put grant awards. You’d include that in your gross income.

Entity considerations: Whether your business is a sole proprietorship, LLC, S-corp, or C-corp, income is income. A C-corp would pay tax on the grant as part of profits (or not if expenses offset). An S-corp or LLC passes through income to you, so ultimately you might pay tax on it on your personal return. The grant doesn’t avoid tax just because it’s under a business structure (unless that structure is a nonprofit, which we’ll get to next).

Capital Grants and Special Cases: Sometimes, government grants are given to businesses for capital projects – like to build a factory in a certain area. Historically, there was a concept of “contribution to capital” that could let corporations exclude certain infusions (including some government grants) from income. Tax laws changed in 2017, making it harder for businesses to exclude government grants as capital contributions (unless it’s literally equity investment or so). This is a pretty technical point – the gist is, the bar for excluding a government grant as not income is very high now, so most of the time you cannot. If you think you have a unique grant that might not be taxable, consult a tax professional and possibly IRS guidance.

Example: Maria owns a small bakery and receives a $10,000 grant from a downtown business association to help local businesses modernize their equipment. The association does not explicitly say anything about taxes. Maria spends it on a new oven. Tax outcome: Maria’s bakery must include $10k in its income. She can also deduct the cost of the oven (or depreciate it, depending on whether she expensed it fully). Net effect: possibly no increase in profit if expensed, but that $10k is reported. If Maria forgets to report it because “it was a grant, not sales,” she could get in trouble if the association issued a 1099-G or 1099 to the IRS. Always report it.

Record-keeping: Like any funds in your business, keep records of the grant award letter and how you spent the money. If ever audited, you want to show the IRS that yes, it was income but here are the valid expenses against it (or that it was exempt by law). Also, ensure you comply with any restrictions of the grant (if you misuse the grant, you might have to pay it back – which could then raise a question of whether you should have included it in income in the first place or not; complicated, so just use it correctly!).

In summary, for businesses: “There’s no free lunch.” The IRS typically taxes grants to businesses. Plan for it – perhaps set aside a chunk of the grant in case of taxes if it’s pure profit. The benefit of the grant is you can grow your business, but don’t neglect Uncle Sam’s cut. Next, we’ll look at the flip side: organizations that typically don’t pay tax on grants – nonprofits.

Nonprofit and Charity Grants: Tax-Exempt Does Not Mean Unregulated

Many grants are awarded to nonprofit organizations, such as charities, educational institutions, or research institutions. These entities often have 501(c)(3) tax-exempt status (or another 501(c) status). The tax treatment in these cases is different from businesses or individuals because the organization itself is exempt from income tax. However, that doesn’t mean there are no rules involved. Let’s break it down:

Grants to 501(c)(3) Organizations: If a charitable nonprofit receives a grant (say, from a foundation or government agency) to support a program, the nonprofit does not pay income tax on that grant. This is by design – donations and grants are the lifeblood of charities, and taxing them would just divert money away from the charitable mission. Example: A small education nonprofit gets a $100,000 grant from the Gates Foundation to run an after-school program. The nonprofit will use that money for its programs and won’t pay corporate income tax on it.

Reporting and Accountability: Just because it’s not taxed doesn’t mean it’s ignored. Nonprofits usually must report grants and how they used them on their annual Form 990 (the informational return filed with the IRS by nonprofits). Also, if the grant is from a foundation, the foundation has to report it. If the grant has specific conditions (like it must be used for a particular project), the nonprofit should track that to show compliance. In some cases, especially large federal grants, there are audit requirements (OMB Uniform Guidance audits for nonprofits expending $750k+ in federal funds, for instance).

Taxable Expenditures for Private Foundations: There’s a nuance for private foundations (a type of 501(c)(3) that typically has one major donor or family). If they give grants to individuals or for certain purposes without following IRS guidelines, the foundation could incur penalty taxes (the IRS calls some unapproved grants “taxable expenditures” for the foundation). This is more on the grantor side than the recipient. For example, if a private foundation wants to grant money to an individual for study, it needs to have a pre-approved program or else it might violate rules. This is deep in the charity law weeds; as a recipient, just know that reputable foundations will handle their compliance – if they require you to provide reports or go through a process, it’s partly for these tax-law reasons.

Non-501(c)(3) Organizations: What if a grant goes to an organization that isn’t tax-exempt? For instance, a community group that never got official IRS nonprofit status. In that case, the organization might be treated like an individual or business receiving the money – meaning taxable. This is why many grantmakers insist that you have 501(c)(3) status or a fiscal sponsor (a partner nonprofit that accepts the money on your behalf) before giving out grants. Fiscal sponsorship basically allows the grant to go to a tax-exempt entity (the sponsor) which then channels the funds to the project, so that the money isn’t taxed and is properly overseen.

Example: A local arts council (tax-exempt) receives a $10,000 grant from the state government to fund community art projects. The council then sub-grants $1,000 each to 10 local artists. The council doesn’t pay tax on the $10k. What about the artists? If the artists are just individuals and not nonprofits themselves, those $1,000 sub-grants might be taxable to them (likely yes, considered income for their art projects). The council might have to issue 1099 forms to the artists if over $600. This shows how money can be non-taxable at the nonprofit level but become taxable when passed to an individual to carry out the work.

Unrelated Business Income (UBI): One thing for nonprofits to watch – if a grant is for a project that is outside the nonprofit’s charitable mission and it generates revenue, the income from that activity might be taxable as unrelated business income. But typical grants won’t cause UBI since they’re usually in line with the mission (and grants, unlike earned fees, aren’t a “business” activity). It’s more if the nonprofit uses the grant to start some money-making venture not related to its mission that it could possibly face tax on the profits of that venture (UBIT – unrelated business income tax).

Government Grants to Governments or Nonprofits: A huge portion of grant money in the U.S. is government entities giving to other government entities or nonprofits (e.g., federal grants to states for Medicaid, grants to local governments for infrastructure, grants to nonprofits for social services). None of that is taxed – the government doesn’t tax itself, and it doesn’t tax charities for doing the work government wants done. So from a societal perspective, most grant dollars circulate tax-free at the organizational level. The taxes come into play when the money either lands in a for-profit’s accounts or in an individual’s hands as personal income.

Key takeaway: If you run a nonprofit or are involved with one, grants to your organization are not taxed as income. But you must use them for the intended charitable/program purpose. If you were to misdirect the funds (say, pay them out to insiders improperly or use them for something outside the mission), then you could jeopardize the nonprofit’s tax-exempt status or incur penalties. Always keep grant funds segregated for their purpose and follow any reporting duties to the funder.

Now, let’s address grants that go directly to individuals for personal needs or as government aid, which have their own set of rules.

Government & Personal Grants: Welfare, Disaster Relief, and Gifts

Not all grants are for education or business. Sometimes individuals receive grants for personal or emergency needs. Additionally, there are cases where people refer to personal financial gifts or awards as “grants.” Here’s how different kinds of personal grants are treated:

Disaster Relief Grants: If you receive money due to a disaster or emergency (like a hurricane, wildfire, or pandemic), it might come as a government grant or assistance. The tax code (specifically, IRC §139) provides that qualified disaster relief payments are not taxable to the recipient. This includes amounts to cover things like temporary housing, personal expenses, medical costs, funeral costs, etc., as long as they’re a result of a declared disaster and not compensated by insurance. For example, FEMA grants to individuals after a natural disaster – these are generally tax-free. If your home is destroyed and FEMA gives you $10,000 to rebuild, you won’t owe tax on that grant. Similarly, some pandemic-related individual grants (like certain state stimulus for households or rent relief programs) were treated as disaster relief or welfare and not taxed.

Need-Based Public Assistance: Many government programs give money to individuals based on financial need – for instance, Temporary Assistance for Needy Families (TANF), food assistance (SNAP), housing vouchers, utility payment assistance, and so on. These are essentially grants for personal living needs. The IRS typically applies a “general welfare exclusion,” meaning such payments are not taxable because they’re for the promotion of general welfare (and not a payment for services). So if you are a low-income individual receiving a government grant to pay your heating bill in winter, you don’t pay tax on that. It’s akin to a gift from the government to help you out.

Health and Education Grants: Outside of school scholarships, there are sometimes programs that give individuals money for specific personal improvements – e.g., a grant to retrain for a new job, or a grant to make your home more energy-efficient. The taxability of these can vary. If a state agency gives a direct cash grant to, say, help you install solar panels on your home, often that’s considered a rebate or incentive and might actually be non-taxable (or it might require reducing your tax credits/deductions for the project). If the grant is more like paying you to do something (like a stipend to attend training), it could be taxable. Always check the program’s fine print or ask – many will clarify “this assistance is not taxable” or “consult your tax advisor regarding taxability.”

Personal Gifts vs. Grants: Sometimes people call something a “grant” when it’s essentially a gift. For instance, a wealthy individual sets up a fund to give out “grants” to individuals in need. If there are no strings attached and it’s purely out of generosity, the IRS would likely treat that as a gift. Gifts are not taxable to the recipient (no income tax). The giver might have to file a gift tax return if the amount is over the annual exclusion ($17,000 in 2023, for example) or pay gift tax if they exceed lifetime limits, but that’s not the recipient’s issue. The tricky part is, if the donor is a foundation or something, not a human, it might not be a “gift” in the technical sense. However, charitable organizations can give assistance to individuals in need as part of their program – that’s still not taxable to the individual (treated like a charitable gift), as long as the individual isn’t providing a service back.

Crowdfunding and Grants: A quick note – if you raised money through a GoFundMe or similar (people sometimes say “I got a grant from the public”), the tax outcome depends on donors’ intent. If people gave out of generosity to help you, it’s typically a gift (not taxable). If they were essentially buying something or you promised them something in return, it could be income. But straightforward donations for personal causes are usually considered non-taxable gifts.

Prize or Award Grants: If you receive money as an award – for example, a community “personal achievement grant” or something where you didn’t exactly apply based on need but were chosen for an accolade – that is treated as a prize and taxable. Many foundations and nonprofits give out awards (often called “grants”) to individuals who do great work (artists, humanitarians, etc.). Unless you fit the narrow exception of assigning the prize to charity, you will owe income tax on that award.

Example: Tom is an artist who applied for and received a $5,000 personal grant from a local arts nonprofit to support his work on a mural in the community. The nonprofit does not require any formal work for them, but Tom does have to use the money for art supplies and his time to complete the mural. Is it taxable? This one is a bit grey but generally Yes, it’s taxable to Tom. It’s not a scholarship (not schooling), not a disaster or welfare payment, and not a pure gift (he had to apply and was chosen for his artistic proposal). The IRS would likely see it as self-employment income related to his art services or an award for his art. Tom may get a 1099 form from the nonprofit, or they might not issue one if under $600, but he should report it. However, he can also deduct his art supply expenses, which might offset a lot of that income.

Case in point: The federal Pell Grant for students is often held up as an example – it’s need-based (like welfare for education), but if used for non-qualified expenses, it becomes taxable. Many students don’t realize that a Pell Grant refund check they get for living expenses is taxable. It shows how a grant can straddle both worlds: intended for welfare (education access) but still taxed in part.

Key tip: Always identify the nature of any personal grant:

• If it’s disaster or hardship-related (to help you through tough times) and you didn’t do anything for it, likely not taxable.

• If it’s an award or prize, likely taxable.

• If it’s for education, follow scholarship rules.

• If it’s basically a gift (personal, no services, no application for something in return), not taxable.

When in doubt, ask the grantor or check IRS resources. There is an IRS publication for charitable contributions and disaster relief that clarifies many of these.

Now that we’ve covered various categories, let’s do some direct comparisons and Q&A to cement these concepts, and then we’ll provide some quick FAQs.

Grant Types Comparison: Scholarships vs. Grants vs. Gifts vs. Prizes vs. Loans

It’s easy to get confused by overlapping terms. This section compares grants with other forms of financial aid or income to highlight how each is treated differently for taxes:

This table highlights that grants and scholarships are unique in that they occupy a middle ground – they’re gifts/aid but can turn into taxable income if not used in certain ways. Whereas a pure personal gift is tax-free, and a prize is always taxable, a grant’s tax status depends on context.

Understanding these differences can help in planning: For example, if you have a choice between an award paid to you personally vs. directing it to a nonprofit, the latter might avoid tax (if the award rules allow that). Or if you’re offered a stipend vs. tuition reduction, you know the stipend will be taxed but the tuition reduction might not.

Legal and IRS Evidence: Why Does it Work This Way?

You might wonder, why are some grants taxed and others not? The answers lie in the U.S. tax code, IRS regulations, and even court cases that have shaped these rules. Here are a few key legal points and precedents:

• Internal Revenue Code §61: This is the granddaddy of tax law that defines gross income. It says gross income means “all income from whatever source derived” except as otherwise provided. Courts have interpreted this very broadly. So, by default, a grant is income under §61. The only way it’s not is if there’s a specific exclusion section in the tax code that says so.

• Internal Revenue Code §117: This section provides the exclusion for qualified scholarships and fellowship grants. It basically says amounts received as a qualified scholarship by a degree candidate at an educational institution are not includable in gross income, to the extent used for qualified tuition and related expenses. It also says that if the payment represents compensation for teaching, research, or other services, or if it’s for studying not leading to a degree, then it doesn’t count as a tax-free scholarship (with some exceptions for certain work-study programs). This section is why tuition scholarships are tax-free but stipends aren’t, and why non-degree scholarships are taxable.

• Tax Reform Act of 1986: A significant law that tightened the rules on scholarships. Before 1986, you could use scholarship money on room and board tax-free. The 1986 law explicitly made scholarship funds used for living expenses taxable. So that’s why we have the current setup.

• IRC §139: This section, added in 2002, formalized the exclusion for disaster relief payments. It says if you receive payments to help you in a qualified disaster for personal, family, living, or funeral expenses, those payments aren’t taxable. It was used heavily during COVID and other disasters to shield relief payments from tax.

• IRS Revenue Rulings/Announcements: The IRS sometimes issues rulings, for example:

  • Rev. Rul. 2003-12: Confirmed that disaster relief payments (section 139) are tax-free and not subject to reporting.

  • IRS Publication 970: This isn’t law, but it’s an IRS publication that explains in plain language the tax treatment of scholarships, fellowships, grants, and also covers things like Fulbright grants (for U.S. students abroad, those typically are taxed similarly unless used for tuition).

  • IRS FAQs during COVID: The IRS clarified that pandemic aid to businesses (PPP, etc.) and certain stimulus to individuals weren’t taxable because Congress said so. But also reaffirmed that generally, a business grant is taxable (e.g., an FAQ on CARES Act grants to businesses stated: “The receipt of a government grant by a business is not excluded from gross income under the Code and therefore is taxable.”)

• Court Cases: A couple of notable ones:

  • Bingler v. Johnson (394 U.S. 741 (1969)) – U.S. Supreme Court case dealing with whether certain stipends to employees for graduate study were excludable scholarships or taxable compensation. The Court sided with the IRS’s view that if it’s basically pay for services or an inducement for employment, it’s not a true scholarship. This case is often cited to distinguish scholarships from disguised compensation.

  • Commissioner v. Duberstein (1960) – a Supreme Court case about what counts as a “gift” vs. taxable income in a business context. It’s relevant to grants because it explained that a “gift” in the tax sense proceeds from “detached and disinterested generosity.” If a payment is really to get something in return (even goodwill or business benefit), it’s not a gift. So, a foundation’s grant to an individual can be viewed through this lens: is it a disinterested generosity (then it could be a gift) or is it to reward or incentivize something (likely taxable)? That line can be fine, so the default lean is taxable unless clearly a gift.

  • There have been various Tax Court cases on scholarships, such as those dealing with athletes or specific programs, but generally they uphold the IRS position that room and board scholarships are taxable.

• IRS Form 1099-G and state coordination: As mentioned, Form 1099-G’s instructions explicitly say state and local grants are taxable unless law says otherwise; federal grants too. So governments themselves are instructed to assume their grants are taxable when reporting them, which tells you how the law views it normally.

• State laws: For the most part, states follow federal definitions of income. A few states had to pass legislation during COVID to exclude PPP from state taxable income. If you’re dealing with a non-federally exempt grant, check if your state might exclude it. For example, a state might exclude certain state-level agricultural grants from state tax to encourage farming, even if it’s taxable for federal – but that’s case by case. Generally, state and local taxes piggyback on the federal treatment for these items.

Knowing the legal underpinnings isn’t necessary for day-to-day, but it helps to understand that the tax code intentionally taxes certain aid and intentionally spares other aid. The rationale often comes down to policy: Congress wants to encourage education, so it gives a tax break for scholarships (but not an unlimited one). It wants to help disaster victims, so it spares that money from tax. But absent a special societal reason, a grant is income like any other.

Finally, let’s address some frequently asked questions that often pop up in forums and advice columns, to directly answer those quick queries.

FAQ: Frequently Asked Questions about Grants and Taxes

Q: Are grants considered taxable income?
A: Yes, by default most grants are taxable income. However, specific types (like qualified education grants or disaster relief funds) can be tax-free if certain conditions are met.

Q: Do I have to pay taxes on my Pell Grant refund?
A: Yes, if you receive a Pell Grant refund that covers personal expenses (beyond tuition and required fees), that portion is taxable. The part used for tuition and course costs is not taxed.

Q: Is a small business grant taxable for my LLC?
A: Yes, business grants are generally taxable to your business (LLC, sole prop, etc.). You must report it as income, though you can deduct business expenses paid with the grant.

Q: Does a nonprofit pay taxes on grants it receives?
A: No, a 501(c)(3) nonprofit does not pay income tax on grants used for its charitable purpose. Grants to tax-exempt charities are tax-free for the organization (but must be used appropriately).

Q: Are research grants or stipends for PhD students taxable?
A: Yes, typically the stipend portion is taxable. No for any part applied to tuition. If no tuition, then yes the full stipend is taxed (even if called a “grant” or fellowship).

Q: I got a grant from a charity to pay my medical bills – taxable?
A: No, genuine need-based grants for medical or personal hardship are usually not taxable. They’re considered charitable assistance or disaster relief and excluded from income.

Q: Will I receive a tax form for my grant?
A: Maybe. Government agencies issue 1099-G for taxable grants. Private grantors might send a 1099-MISC. No form is required for scholarships/fellowships, so you must self-report taxable portions.

Q: Do grants count as income for FAFSA financial aid calculations?
A: Yes, if the grant was taxable (e.g. scholarship for living expenses), it raises your prior-year income which FAFSA uses. No impact if it was entirely tax-free for tuition (not in your taxable income).

Q: Is a grant the same as a gift for taxes?
A: No, not usually. A gift (pure generosity) isn’t taxed to the receiver. A grant is often conditional or purpose-driven, and is generally taxable unless falling under specific exclusions.

Q: Can I avoid taxes on a grant by donating it to charity?
A: Yes, in some cases you could refuse/redirect the funds to a charity. But once you accept a grant personally, no, you can’t avoid tax by later donating (you might get a deduction, but still have income). Some awards allow direct charitable transfer to avoid income – those are special arrangements.