What do Coronavirus Relief Grants Mean For Your Year-End Tax Bill?

As we’re nearing the end of what feels like the longest and strangest year in recent history, many businesses are shifting their focus to year-end planning.

This year was tough on everyone, but small businesses struggled in particular. Many businesses saw their operations impacted significantly by government restrictions and they had to rely on various relief funds in order to weather the storm. These business also need to be thinking about the tax bill that may be waiting for them as the calendar flips to 2021.

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.

However, state and local jurisdictions’ conformity to the federal treatment can vary. For example in New Jersey, the division of taxation has confirmed that grants and tax credits issued by the NJEDA, The New Jersey Economic Development Authority, or COVID-19 grants issued by any NJ county are not subject to tax under the New Jersey Gross Income Tax Act and the Corporation Business Tax Act and should not be reported as income on a New Jersey Income Tax return.

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.

Author: Gianluca Panarelli, CPA, MST, gpanarelli@withum.com