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

[jesdq1]

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".   

[qbteachmt]

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.

[qbteachmt]

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

[jesdq1]

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]

"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.

[jesdq1]

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. 

[qbteachmt · Accepted solution]

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.

[jesdq1]

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   

[Accountant360]

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]

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. 

[jesdq1]

how do we get qbteachmt back on the line?

[qbteachmt]

"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.

[qbteachmt]

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

I was already trying to copy, paste and type 🙂

[jesdq1]

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

[qbteachmt]

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.

[jesdq1]

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

[qbteachmt]

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.

[jesdq1]

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

[qbteachmt]

"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.

[jesdq1]

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

[qbteachmt]

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.

[karzak]

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?

[qbteachmt]

@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.

[karzak]

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

[karzak]

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

[qbteachmt]

"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

[TaxCurious]

You've provided a lot of semi relevant information but in fairness to the original question, you haven't answered it.  The question started with 'I know it's income taxable' and everything you've provided has re-answered that question.   One might infer a few things from what you've provided, but they could have inferred before they started, they wanted a specific cite REGARDING SELF EMPLOYMENT SPECIFICALLY which you have not provided.  This is part of the intuit community's ongoing plague of 'here's not quite an answer,  vote for it as best answer - answer provided by top poster' and I'm sure it's not only helpful and interesting for you, but you're also putting a lot of hard work into it which should be appreciated.   But the specific question has not been answered with a relevant cite, and it might be time to say 'I couldn't find anything that's right on point'.   I think the counterpoint raised above, that unemployment replaces fica taxable income but is not fica taxable because it wasn't active, is very relevant and undermines your answers in the absence of a context link between them.

[TaxCurious]

"They would have Applied for it, because no one randomly sends out funds"   300 million 1444-C letters say you're wrong.

[qbteachmt]

@TaxCurious 

You're wrong about the 1444 series funds. Those are not randomly sent to businesses. There's no need to also cover that here.

"they wanted a specific cite REGARDING SELF EMPLOYMENT SPECIFICALLY which you have not provided."

Yes, a number of responses, not only in this topic, have explained how this is Business Income. And since Business Income would be subject to all taxes related to Business, the Sched C filer has SE tax because it affects the bottom line that is reported as Taxable Business Income. There is nothing to infer or cite, if you simply would follow the links provided. And since this topic you just updated is from April, here is a current link:

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

Which in turn goes to a guidance link:

https://home.treasury.gov/policy-issues/coronavirus/assistance-for-state-local-and-tribal-government...

All of which is provided by your government.

Now, you do need to understand the specifics of the grant your client received, because there are different treatments for specific grants. Once you know these details, you do the research. You don't need opinions or guidance from peers, if you use the governmental authorities as your source. If you want to get to the raw IRS sections and code, start with the CARES Act, of course. And once you know the grant info, for a business, is one that trickled down, you can use non-IRS resources such as:

https://home.treasury.gov/policy-issues/coronavirus/assistance-for-state-local-and-tribal-government...

In fact, all you need to do is google:

cares act business grants taxable

And if you do your own research, you can read things like:

https://news.bloombergtax.com/daily-tax-report/insight-taxation-of-virus-relief-grants-to-households...

"Short Answer

Grants to households (i.e., individuals) are taxed differently than grants to small businesses. As explained below, need-based grants to households likely fall under the general welfare exclusion, and are therefore not taxable, whereas grants to small businesses are likely not covered by this exclusion, and would be taxable.

Household Grants

Taxpayers are taxed on their gross income, which is defined as “all income from whatever source derived.” (Tax code Section 61.) However, there are several exclusions from that statutory rule, and the Internal Revenue Service has long recognized a non-statutory exclusion to that rule, i.e., the general welfare exclusion.

The general welfare exclusion exempts from the recipient’s taxable income payments by governmental units under legislatively provided social programs that promote the general welfare. To qualify, the payments must (1) be made from a government fund, (2) be made for the promotion of general welfare (generally based upon individual or family needs), and (3) not represent compensation for services rendered. (Revenue Ruling 75-246; Rev. Rul. 82-106.)

Need-based grants to households are likely excluded from taxable income under the general welfare exclusion. However, there are other possible exclusions for the grant, including characterizing it as a gift under Section 102, as a qualified disaster relief payment under Section 139, or as a capital contribution to the business.

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. (Rev. Rul. 2005-46)

Congress recently changed the tax code to make clear that any contribution by a governmental entity to the corporation is taxable. (Section 118(b)(2).) 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 th...."

On your own. Or, you can expect peer users to act as your very own research clerk. Because, you might have noticed how many of the questions here are because people don't bother to do their own research, don't pay attention in CPE class, or some other reason that makes them decide to rely on this software users' group as if it is their local tax library.

"This is part of the intuit community's ongoing plague of 'here's not quite an answer, vote for it as best answer - answer provided by top poster' and I'm sure it's not only helpful and interesting for you, but you're also putting a lot of hard work into it which should be appreciated."

It's because people can't bother to do their own research or don't seem to know how to use search tools, that the rest of us will try to "teach a man to fish" and not throw the fish at him, battered and fried and deboned.

You are welcome to the fish I have prepared here. Hope you enjoy it.

[qbteachmt]

"I think the counterpoint raised above, that unemployment replaces fica taxable income but is not fica taxable because it wasn't active, is very relevant and undermines your answers in the absence of a context link between them."

UI, PFUA, PEUC, LWA, FPUC, PUA, MEUC, and all the other acronyms, are payable to the Individual. This is a Business topic. It's always tough when one topic strays into multiple perspectives.

"vote for it as best answer - "

In your user profile settings, you can turn off all the social networking functions, such as Likes and Voting. You can only mark as Solved a topic where you started that topic.

"answer provided by top poster"

As for "top posters" it might help to know that those of us in this peer community coming from prior years' of forums (and platforms) were given our prior posting count to carry over. And your username works on any Intuit forum; I am on more than just this one. Some of the previous "all stars" converted to "champs" as well. You can see their labels with their usernames, when they post.

Just more of the social networking tools applied to a business community.

[BobKamman]

The link to Rev Rul 2005-46 actually goes to Rev Proc 2005-46.  The Revenue Ruling, meanwhile, deals only with a corporation.  People can talk all day about grants and self-employment tax, but there won't be reliable authority for another few years.

[qbteachmt]

"The Revenue Ruling, meanwhile, deals only with a corporation."

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

"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."

Clarified by the IRS July 6, 2020.

Another reference: https://www.jdsupra.com/legalnews/weekly-irs-roundup-july-6-july-10-2020-32220/

And let's review the specific detail that matters: Your taxpayer that gets one of these economic recovery grants (new ones being issued in 2021, but this entire subject with multiple topics started in early 2020) needs to help you confirm where that grant came from and what it is considered part of. For instance, your County might have been given funds from your State, which got the funds from the Feds, to give to local health care providers, and you would need to see if that is a carve out from Fed taxability, from State taxability, from both, or from neither. Example:

"The IRS added frequently asked questions on the treatment of grants or loans to health care providers through the Provider Relief Fund established by the CARES Act. The IRS stated that payments from this fund do not qualify as a qualified disaster relief payment under section 139 of the Internal Revenue Code (IRC) and, in turn, are includible in gross income. The IRS also stated that a tax-exempt recipient generally is not subject to tax on a fund payment unless the amount is a reimbursement to an unrelated trade or business under section 511."

And that means getting informed and staying updated on the areas you specialize in. I've been watching the SVOG (shuttered venues operator grants) since they were first announced in 2020, not even issued until 2021, not taxable, and being administered by the SBA. Not by your local or regional governmental entity or filtering down from the State.

"The Shuttered Venue Operators Grant (SVOG) program was established by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, and amended by the American Rescue Plan Act. The program includes over $16 billion in grants to shuttered venues, to be administered by SBA's Office of Disaster Assistance."

Everything matters. Where the money comes from (after we taxpayers provided it...), what it is specifically for, who got it and what is your entity type, who you got it from...

[BobKamman]

Relying on IRS press releases as tax authority is like relying on Pentagon press releases for Afghanistan defense progress.  

[qbteachmt]

Of course you are right, Bob. Afterall, it's not as if I should expect anyone to use the links, and then when they get to the webpage for released guidance, and those in Q&A format (not press releases), it's not as if they might bother to further follow links or even pop up the attached pdfs, or even use the resources to see the sections of IRC are most often available by simply following the reference materials. Since they already asked on the tax prep forum, and didn't  do their own research already, I will always start with the least technical resources for them, as the wording is often laymen terms. That's why I like, for instance, investopedia, and would link that in lieu of the IRS, often.

[qbteachmt]

One of the points I try to highlight is that a Grant is driven by the Issuer. Here are some links to follow that will help, when a client tells you "I got a grant" for you to understand that isn't enough info.

https://www.uschamber.com/co/run/business-financing/government-small-business-grant-programs

https://www.nav.com/resource/small-business-grants/

https://www.nerdwallet.com/article/small-business/small-business-grants

[TaxCurious]

Ok, thank you, all very good information and helpful.   But in the end, the answer to the question 'do you have a specific cite regarding whether this is subject to self employment tax' appears to be 'no, I don't have one, I can't provide that'

Which is fine, things are developing fast and they're weird.   I mean for instance if someone asked you if the expenses you pay with a tax free PPP grant are deductible, this process of linking to general guidance would lead to the wrong answer.  And if a grant is for capital replacement, it is not subject to self employment tax despite all the links you've sent.  And the most specific cites you sent related to corporations in which S/E tax is moot. So again, we're at the point where you've provided a lot of high quality bases for inference, but no specific cite regarding the S/E question specifically.  Probably it doesn't exist and we have to infer.   

I think you did a good job, it's just sometimes one must be brave and admit he can't find the answer.  There's a lot of uncertainty in life.

[qbteachmt]

" 'do you have a specific cite regarding whether this is subject to self employment tax' appears to be 'no, I don't have one, I can't provide that'"

Only if you believe, that business income which falls to the bottom line, then bypasses SE.

Because I don't know how many ways to show the consensus and the IRS guidance is that this is Ordinary Business Income.

[qbteachmt]

Okay; no one is sending anything. This is a forum on the web.

"I mean for instance if someone asked you if the expenses you pay with a tax free PPP grant are deductible, this process of linking to general guidance would lead to the wrong answer."

Only if you find the wrong links, then share them. And everything has been subject to change, so that is another reason to provide Current links (as of this date and the work being done today). I ignore articles that are not dated, for that very reason.

"And if a grant is for capital replacement, it is not subject to self employment tax despite all the links you've sent."

Oh, now you need to provide this evidence. Because only specific provisions exist, such as grants for upgrading HVAC that fall under CARES Act because they were issued for that purpose.

"And the most specific cites you sent related to corporations in which S/E tax is moot."

Only if you don't believe it relates to business income.

If you need to, you can ask the IRS yourself.

[qbteachmt]

It occurred to me this has been info sought from the wrong source. It's not only the IRS to consider, when you want to debate this topic; it should include SSA, for SECA. And I'm tired of being asked to cite something. If the articles and the guidance on the web are not good enough, do your own research. That's how I stay current. You can, too.

For further clarity, I pulled up the SSA info for what is considered income for their purposes Here is their table (it is being kept updated as of now):

https://secure.ssa.gov/apps10/reference.nsf/lnx/07232021123646PM

The question remains, what is the citation source for all the comments and articles, that these grants to businesses are to be treated as business income and therefore, falling to the bottom line, which means subject to SECA in case of specific entities.

The answer for the IRS, for what is Gross Business Income, which would be in the bottom line affecting Net and taxable, is found in IRS section 61, of course. Read it. All of it.

One issue for a business (regardless of the entity type) comes down to the comment seen time and time again in the guidance, the articles, the research on these developing topics: The IRS has ruled: "In general, payments to businesses do not qualify under the general welfare exclusion because the payments are not based on individual or family need. See Rev. Rul. 2005-46; Notice 2003-18."

As to the issue of disaster and recovery, or gift, this is well covered here:

https://www.taxnotes.com/research/federal/irs-guidance/revenue-rulings/disaster-grants-to-businesses...

No need to copy it to this forum. Please read it for yourself. It references "Disaster Grants To Businesses Aren't Excludable From Gross Income, IRS Rules.", from JUL. 1, 2005; Citations: Rev. Rul. 2005-46; 2005-2 C.B. 120. That's pretty old, but I don't find it overturned.

And since this topic was started during CARES Act ERF (Economic Recovery Funds) and now we have CAA Act ARP (America Rescue Plan) funds being disbursed, it's been mentioned more than once that you need to know the specifics of the taxpayer's grant, the agency issuing the grant, the purposes of the grant, and whether there is any Fed or State specific exclusion from Gross Business Income as contributing to taxable income for that business.

That's because a lot of people are still getting it wrong. Just because it was issued during coronavirus days, doesn't make it a CARES grant. Example: In the SSA table, they refer to the California Golden State Stimulus, and the Business Grants are not part of the GSS:

"The Golden State Stimulus is part of Governor Newsom’s California Comeback Plan, the historic $100 billion plan to stimulate the economy and address the state’s most pressing challenges. Other elements of immediate relief in the plan include:

• Largest small businesses relief program in the nation, investing $4 billion in direct grants to California’s small businesses, on top of a massive $6.2 billion tax cut.
• Largest statewide renter assistance in the country, providing $5.2 billion to help low-income renters pay 100 percent of their back-rent, and an additional $2 billion for past-due water and utility bills."

For SSA, the GSS to individuals won't be counted as income towards any limit, such as SSDI reductions. The CA stimulus grant your taxpayer's small business gets through the "Comeback Plan" isn't under the GSS, because the GSS is the part that applies to individuals.

I really hope this helps those of you who need citation source.

Have fun.

[TaxCurious]

Yes I agree, everything you're saying makes sense.   It's just, if it were that simple there would be no such thing as a separately stated item, right?  All ordinary income is in the bottom line, but not everything in the bottom line is ordinary income (the dogs / poodles rule).   The only entity which really has one all inclusive bottom line the way you're describing isn't subject to SE tax (C Corp).

[qbteachmt]

I believe I stated it is "ordinary business income" and "ordinary income to the business" so there is nothing about stating it separately. I never found anything that tells you to state it separately, other than, State treatment might vary.

And really, there is no all-encompassing answer for these grants. That's your first determination. Until you know the grant specifics, you don't know anything about the reporting. It's not unusual for people to post a question without enough details, of  course.

[rbbartlettconsul]

I totally agree with this post. No where in all the discussions was whether the tax treatment of government grants for a business (non-corporate of course) subject to SELF-EMPLOYMENT TAX. Of course it is taxable for INCOME TAX purposes (only certain PPP and EIDL loans are not taxable). But the first question was about SELF EMPLOYMENT TAX, and that question was NEVER answered. 

My guess is that it is subject to SELF-EMPLOYMENT TAX because it relates to a business that is subject to SELF EMPLOYMENT TAX.  But I do not know for sure.  

[qbteachmt]

"But the first question was about SELF EMPLOYMENT TAX, and that question was NEVER answered."

Yes, it's been specifically stated: it's business income the same as if a customer paid you. There is nothing different about it. The grant was given in place of business income, so the Feds treat it as business income. If your taxpayer is Sched C, this is subject to SE, because it is business income.

Unless there is a specific exclusion for that grant (such as Shuttered Venues and Food Banks) and unless your State treats it differently under some exclusion, all you do is consider this part of Gross Revenue for the business.

[BobKamman]

As I posted in August, "People can talk all day about grants and self-employment tax, but there won't be reliable authority for another few years."

[qbteachmt]

Try excluding grants from business gross with some self-employed clients, and let us know what happens. Because so far, every resource I find, including the IRS, describes this as: "The receipt of a government grant by a business generally is not excluded from the business's gross income"

which is Line 1, Schedule C.

There are some very specific grants that can be excluded. Fed and States all have various provisions. Nowhere have I seen you are supposed to call it "other" on the business or the personal returns, because it is not Means Tested and it is for Business.

[BobKamman]

You are certainly entitled to your opinion.  

[qbteachmt]

There has to be reliable reference that this is Not Taxable for SE. You can find lots of evidence for which grants are excluded for purposes of income reporting. Until you can prove it is bifurcated (to use a word I know you like), there is only what the IRS has stated. It is not my "opinion." That is important for others reading these topics to understand. Until anyone can post authoritative reference otherwise, it's business gross income and is subject to SE for the Schedule C filer. It has been that way since these grants were first released.

[TaxMann]

I read all of these posts.  I think you are my new hero.  I am very happy you are sticking to your guns.  I believe you are 100% right, but people are expecting that there needs to be a law that says in every specific scenario, a specific thing is taxable.  That is not the case.  Everything is subject to tax.  All SE income is subject to SE tax.  

I am going to help and cite IRC Section 61.  This is the code that says everything is taxable.  

I am then going to cite IRC Section 6017 which says all (schedule C) business income over $400 is subject to SE tax (kind of in a loose way).

I am then not going to cite anything else, because that's where it ends.  

I learned a long time ago from my very first tax class that everything is taxable per IRC Sec 61.  The entire rest of the tax code is there to help make it non-taxable.  If there isn't a law that says it isn't taxable, then it is taxable.  I am assuming that SE tax is the same way.  

The absence of a law, means it is subject to regular and SE tax.  All of the arguments against "qbteachmt" have a specific tax code assigned to them to make them treated in those specific ways.  Grants are not unemployment, as unemployment is defined in IRC Section 85.  Nowhere does it mention grants.  

Someone pointed out that it was a waste of "qbteachmt"'s time to respond to these.  I would agree that it is probably a waste of your time to have to respond to all of this, however, your passion to stick to reality helped me immensely; to find that no one knows of a law which exempts it. 

I get it.  A schedule C making money to be right in the area of SE tax is going to be a huge deal for that taxpayer.  I appreciate the passion everyone has for their client to save money.  It just seems like the most important fact was lost in all of this, and "qbteachmt" repeated it multiple times:

It is irrelevant whether the grant is subject to SE tax. The grant MUST be spent on specific expenses. This means that the grant is offset by specific expenses, therefore making none of it in the Net income subject to SE.  In other words, the grant comes in, the expenses reduce the grant to zero, and those expenses no longer reduce SE revenue. So now the revenue subject to SE tax is higher by the amount of the grant.  The grant goes inside of the Sch C and is going to indirectly increase SE income regardless of it being earned or not.

I do appreciate all of the people stating that we need primary sources, but sometimes the lack of a code just means that the bad thing is correct.

"qbteachmt" thank you for all of the time and energy which you invested in this article.  I appreciate it and the lack of official reg or IRC citing.  You were technically citing the lack of code sections the entire time (even though you cited IRS guidance towards the lack of codes).

[qbteachmt]

"I learned a long time ago from my very first tax class that everything is taxable per IRC Sec 61."

Wow, thanks. It's equally important to note that this was quoted in an earlier response where I once again pointed out there are specific exclusions, but otherwise, everything is considered taxable. Along with, everyone needs to note the Dates on these topics, because reportable income or not, deductible expense or not, and various qualifications, between State and Fed, are often changed. These grants are overlapping into a third year, and you cannot make the assumption that things in one year have carried on in that same condition to other years. Anything you read on the web must be read in perspective.

[jesdq1]

"In other words the grant comes in , the expenses reduce the grant to zero and those expenses not longer reduce SE revenue" "So, now the revenue subject to SE...."

That is exactly the logic I used to complete the  2020 tax return.  

I stated this in my thread responses of 2/20/21 and 03/03/2021, (and mentioned in a thread from qbteachmt), thus I  marked it as "solved". 

And, I am keeping my eye on this topic. If anything changes my fat fingers will be tapping away on an Amendment.  

I thank everyone for their input.