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

Forum|Forum|5 years ago
February 20, 2021
50 replies
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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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Best answer by qbteachmt

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.

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.

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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J

jesdq1Author

Level 4

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.

Don't yell at us; we're volunteers

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)?

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