Are all grants to businesses coming from SLFRF grants considered gross income and therefore taxable? (This presumably would require cities to send 1099-Gs to businesses that received grants.)

Businesses should anticipate that the Internal Revenue Service (IRS) may treat Coronavirus State and Local Fiscal Recovery Funds (SLFRF) grants as taxable gross income. The IRS released guidance on the taxability of SLFRF, indicating that “[s]ome SLFRF recipients may have to report certain payments as income and may owe tax depending on the purpose of the payment.”[1] Specifically, payments that are not taxable are those made to:

• reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster, or
• promote the general welfare in connection with a qualified disaster. See Internal Revenue Code (the “Code”) section 139(b)(1) and (4).

While there is an exemption for grants made to promote the general welfare in response to a qualified disaster, like the COVID-19 pandemic, this is typically only applicable to individuals and families (i.e., not businesses). Additionally, this exemption does not apply to grants that are made to compensate individuals or businesses for services rendered.[2]

The IRS notes that:

“Payments are not treated as qualified disaster relief payments if the payments are in the nature of compensation for services performed by the individual. Additionally, payments made to or for the benefit of an individual are not treated as qualified disaster relief payments to the extent the expense of the individual compensated by such payment is otherwise compensated for by insurance or otherwise. See section 139(b)”[3]

In general, individuals must include in gross income any payment or accession to wealth from any source unless an exclusion applies.[4]

While the question of whether grants to businesses is considered gross taxable income is not explicitly answered for SLFRF grants, the IRS did state that Coronavirus Aid, Relief, and Economic Security Act (CARES Act) grants issued in cases of a government starting a grant program to support business generally are not excluded from the business’s taxable gross income:

“Yes, receipt of a government grant by a business generally is not excluded from the business's gross income under the Code and therefore is taxable. However, a grant made by the government of a federally recognized Indian tribe to a member to expand an Indian-owned business on or near reservations is excluded from the member's gross income under the general welfare exclusion.”[5]

As such, municipalities should consider issuing 1099s to businesses that receive SLFRF and CARES Act grants that are taxable pursuant to IRS guidance issued to date. Municipalities should seek the advice of their tax professionals to address the specific facts and circumstances regarding their tax obligations.

Last Updated: January 23, 2023