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Is a CARES ACT grant to a business subject to self employment tax?

jesdq1
Level 3

A LLC partnership (General Partnership) received a grant for $8,500. Since these grant dollars are not a result of self employment income are they subject to self employment tax?  Or, is the grant considered a part of the normal income that would have transpired if COVID never happened? Put another way, these dollars were not earned, or are they considered "earned".   

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qbteachmt
Level 15

The link I gave is for the most likely Grant program your client got. And as you point out, it was used for expenses. That makes the income a wash against the expense; both would be reportable as pertaining to operations. It's not clear how a retail store would have this as passive income.

I have had this tab open all year:

https://commerce.mt.gov/Montana-Coronavirus-Relief/Awarded-Grants

And the link my State points us to is the same I have given you.

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qbteachmt
Level 15

They are to be spent on specific things related to the impact of the coronavirus disaster, such as PPE. It's regular taxable business income, and it will be offset by those new but regular business expenses.

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qbteachmt
Level 15

Right here:

Q. If governments use Fund payments as described in the Fund Guidance to establish a grant program to support businesses, would those funds be considered gross income taxable to a business receiving the grant under the Internal Revenue Code (Code)?

A. Yes. The 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.

https://www.irs.gov/newsroom/cares-act-coronavirus-relief-fund-frequently-asked-questions

 

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jesdq1
Level 3


Thank you, yes I have seen that on the IRS website.  I know it is subject to regular business tax, is included in income, but it  seems to me that the grant portion of the income is passive income, subject to regular business tax but not self employment tax (?)  The recipient of the grant did nothing to generate that income in his/her line of business. 

qbteachmt
Level 15

"but it seems to me that the grant portion of the income is passive income, subject to regular business tax but not self employment tax"

Who gave the grant? Why did they apply for it? What is on their application? What type of activity are they involved with?

You didn't state this as PPP, or EIDL, or any specific Grant. I gave a link that explains what a business grant would be treated as, when it isn't one of the incentive grants, not one of the replacement grants, and not one of the retention grants.

You stated this would be passive, but you never stated which specific grant this is or what this partnership does. I gave a link to business grants that would come through from the State, County, local grant, or from an Agency.

Example:

The business is now expected to incur extraordinary expense as a result of responding to the covid-19 conditions and the grant is supposed to help offset this unexpected expense.

"The recipient of the grant did nothing to generate that income in his/her line of business. "

But did they incur something out of the ordinary? Example: Health Care Partnership has new PPE expense. Dentist office needs plexiglass shields.

More details always helps.

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jesdq1
Level 3

The grant was given by the state of Michigan, Michigan Economic Development, "small business restart program" designed to help with working capital during COVID for rent ,mortgage payment, utilities, payroll.  The application was for working capital due to loss of income during COVID. The partnership is a retail store. The grant was used for expenses. 

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qbteachmt
Level 15

The link I gave is for the most likely Grant program your client got. And as you point out, it was used for expenses. That makes the income a wash against the expense; both would be reportable as pertaining to operations. It's not clear how a retail store would have this as passive income.

I have had this tab open all year:

https://commerce.mt.gov/Montana-Coronavirus-Relief/Awarded-Grants

And the link my State points us to is the same I have given you.

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jesdq1
Level 3

I was defining the grant money as passive, the retail store is not passive,  but I think I get it now.  The grant was used to offset expenses of the business, so reportable and in the P&L of the business and subject to all taxes. Thank You   

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Accountant360
Level 1

I'm not sure how this has been 'Solved'. 

There could be an argument made that the proceeds are liken to Unemployment income, which is not subject to SE tax. 

For grants that are subject to tax and reported on a 1099G, the instructions do not talk about entering the proceeds as Gross Revenue, so what's to stop anyone from reporting as other income (not subject to SE tax). 

Honestly, I'm looking for the Code, specifically - interpretations (such as mine) are great but not super helpful. 

jesdq1
Level 3

Yes, that was my train of thought.  But, the help received from qbteachmt suggested that the grant monies are allocated to the expenses of the business and if that generates a positive bottom line, then that is then subject to SE. Is that correct qbteachmt??? My argument was that the grant money is passive. 

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jesdq1
Level 3

how do we get qbteachmt back on the line?

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qbteachmt
Level 15

"how do we get qbteachmt back on the line?"

I was already trying to copy, paste and type 🙂

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qbteachmt
Level 15

"I'm not sure how this has been 'Solved'."

The original person who asked gets to make that determination. And let's remember there was a very specific Grantor question. Not in General.

Michigan

Retail business

Working Capital; ongoing

"There could be an argument made that the proceeds are liken to Unemployment income, which is not subject to SE tax."

Not for this topic; that would be one of the other economic incentive programs. Again, without seeing the specific Grant, the "business" grants are ordinary income to the business.

"For grants that are subject to tax and reported on a 1099G, the instructions do not talk about entering the proceeds as Gross Revenue, so what's to stop anyone from reporting as other income (not subject to SE tax)."

G = a governmental unit gave the grant. Did you consider what the grant application stated? Because that's where I started. A grant to a business, to stay in business or to prevent them going out of business, is not "other income" for the business. It's supposed to be used for the business expenses, which is why they applied for the grant.

"Honestly, I'm looking for the Code, specifically - interpretations (such as mine) are great but not super helpful."

I literally copied the IRS Q&A into this topic, previously. I also provided the link to that info.

"The CARES Act established the Coronavirus Relief Fund which, among other things, appropriated $150 billion in an effort to support state governments as they attempt to provide relief to individuals and business to deal with the economic impact of the COVID-19 pandemic. Businesses may be surprised to learn, however, that these grant programs give rise to taxable income. In the case of a corporation, gross income generally does not include any contribution to the capital of the taxpayer, but there is an exception that requires an inclusion of income for any contribution by any governmental entity or civic group (other than a contribution made by a shareholder as such). Generally, most state and local jurisdictions conform to the federal treatment for income tax purposes.

https://www.withum.com/resources/what-do-coronavirus-relief-grants-mean-for-year-end-tax-bill/

The tax implications of receiving this much needed grant income can often be overlooked. Corporate taxpayers should make sure to consider the Federal, state, and local tax liabilities due on any grants received while calculating their anticipated tax liabilities for 2020."

https://www.ccsb.com/taxation-of-coronavirus-relief-fund-grants-to-households-and-small-businesses/

Small Business Grants

While grants to small businesses would appear to fit under the general welfare doctrine, the IRS has ruled that grants to a business generally do not qualify for the general welfare exclusion, because they are not based upon individual or family needs.

Congress recently changed the tax code to make clear that any contribution by a governmental entity to the corporation is taxable. Although the rule only applies to corporations, the IRS would likely treat other businesses (e.g., sole proprietorships, partnerships, LLCs and S corps) similarly.

On July 6, 2020, the IRS confirmed that the 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.

https://financialadvisors.com/blog/blogdetails/covid-19-related-government-grants-taxable-or-not

For example, the CARES Act established the Coronavirus Relief Fund, which gave $150 billion to state and local governments to (among other things) establish grant programs to help businesses impacted by the COVID-19 pandemic. The IRS has made clear that these state and local grants to businesses are taxable income.

State and local grants to businesses funded outside the CARES Act are also taxable income to the businesses.

Here, by contrast:

Grants for Shuttered Venue Operators Are Tax-Free
The new stimulus law also gives $15 billion to the SBA to make grants to live venue operators or promoters, theatrical producers, live performing arts organization operators, museum operators, motion picture theater operators, and talent representatives who demonstrate a 25 percent reduction in revenues due to the pandemic.

The SBA may make an initial grant of up to $10 million and a supplemental grant of up to 50 percent of the initial grant. The grants must be used for expenses such as payroll costs, rent, utilities, and personal protective equipment.

 

The SBA also covered 6 months of SBA loan payments for businesses, and they won't need to report this as taxable and they get to write off the interest.

 

Try this summary review:

Takeaways
Here are eight things to know from this article:

1. Government grants are taxable income to the recipient unless the tax law makes an exception.
2. COVID-19-related grants to individuals are tax-free under the general welfare exclusion.
3. COVID-19-related grants to businesses do not qualify as tax-free under the general welfare exclusion and are generally taxable, including state and local grants made under the CARES Act Coronavirus Relief Fund.
4. EIDL advances are not taxable, and expenses paid with such advances are tax-deductible.
5. Business in low-income areas that received EIDL advances of less than $10,000 will be able to apply for an increase in the prior advance to the $10,000 level.
6. The new law sets $20 billion for EIDL advances for businesses located in low-income areas.
7. EIDL advances will not offset PPP forgiveness, and any such prior offsets will be refunded.
8. SBA grants to shuttered venue operators are tax-free, and expenses paid with the monies are tax-deductible.

 

And please, do your own research, if you don't like these answers.

 

 

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jesdq1
Level 3

After reading the help from qbteachmt, I concluded  that this grant money is like a sale coming in from the retail business and cannot be defined as "other income"  since the intent of the covid relief is to offset expenses related to covid .  So, if the grant exceeds the covid ralated expenses, it should be subject to SE tax.  Thanks for all your help

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qbteachmt
Level 15

Glad to help. Just for fun, I counted the grants the State of Montana gave through this program and see 29 listed. 3 are for Public Schools (no tax return), a couple relate to child care, there is Business Adaptation and Business Innovation and Business Stabilization, etc. It's a lot to understand, and even the IRS keeps releasing updated guidance and obsoleting previous guidance.

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jesdq1
Level 3

The state of Michigan gave our 52.5 million to 6,000 business ranging from $1,500 to $15,000 per grant. 

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qbteachmt
Level 15

Our 29 categories show $775 million! Ahhhh - my tax dollars at work. I started watching Live Entertainment Grants, because my spouse is a performing musician. Two providers in my town got $1m each.

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jesdq1
Level 3

Well how about unemployment,  I have clients that have jumped into the next tax bracket due to unemployment payments. 

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qbteachmt
Level 15

"Well how about unemployment"

This is why you might delay filing those clients. MD has just changed their tax treatment of UI and Durbin has a bill pending now to exempt $10,200 for Fed taxes.

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jesdq1
Level 3

Do you think this will be for 2020 or 2021?  So, there may be a lot of amended returns. 

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qbteachmt
Level 15

Another person posted this comment: "I don't feel lucky in MD. Their retroactive law also exempted assorted state and local COVID relief grants from MD tax. They have to modify the forms to allow for this subtraction."

So, that might cause other States to follow. My State Legislature only meets every other year, but they are in session right now, so anything could happen, still.

"Do you think this will be for 2020 or 2021? So, there may be a lot of amended returns."

Some of it is for 2020 and will simply be enacted late. But there are many things that have been retroactive to previous year when passed, too, and you are right; lots of amendments. And look at the all the stuff that is going to result in Corrected forms and amendments: The W2 Social Security deferrals, the IRA/retirement disaster distribution deferrals, for just a few.

 

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karzak
Level 2

I have a client that received a 1099MISC, in the name of the LLC with box 3, other income, showing the $9,000 grant.  Is this subject to SE?

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qbteachmt
Level 15

@karzak 

Typically, yes. Unless you find a law that specifically exempts it. You did not state what sort of grant this was. They would have Applied for it, because no one randomly sends out funds. Find out what that grant was for, and find out if that is specifically exempt. Examples that might be exempt include HVAC system improvements, Food Bank, and similar "public good" needs.

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karzak
Level 2

Thank you.  I will find out.  She is an acupuncturist.  No employees.

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karzak
Level 2

It is a redevelopment grant from Montco Strong Small Business Grants.

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qbteachmt
Level 15

"Q. If governments use Fund payments as described in the Fund Guidance to establish a grant program to support businesses, would those funds be considered gross income taxable to a business receiving the grant under the Internal Revenue Code (Code)?

A. Yes. The 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."

 

From: https://www.irs.gov/newsroom/cares-act-coronavirus-relief-fund-frequently-asked-questions

 

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fdickinson
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