For many high growth technology companies, a state or federal grant is a blessing. It can help fund R&D, clinical trials, or otherwise provide the capital needed to expand. The casual observer could hardly be faulted for thinking that if, for example, the National Institutes of Health wanted to give a company a grant, that the IRS wouldn’t tax the grant. That would be absurd, right? After all, why would one hand of the government want to take back cash that the other hand just offered? The truth is complicated, and exasperating. Government grants are in fact taxable depending on how the money is used, and how the recipient chooses to do business (i.e., LLC vs. Corp).Here’s how the tax rules work. The general IRS rule is that all income (regardless of the source) is taxable. However, there is a major exception to this general rule. In 1954, the federal income tax laws were amended so that corporations (including S-corporations) could receive government grants tax-free – if certain conditions are met. Some of the key conditions for a grant to be tax-free include the following: the government money can’t be compensation for goods or services;the government money must be invested in depreciable… Read full this story
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