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Is it a Grant or a Gift |
by Tom Copeland
May 2001
When your business is given anything, it is taxable income. It can be cash, a grant from a government agency, a swing set from a nonprofit agency, a used toy from a parent of a child in your care, even food from a church food shelf. Anything given to your business, even if it seems like a gift, is a grant and therefore always taxable.
The dictionary definition of a grant is any monetary aid (including the value of an item) or a subsidy. A subsidy is a grant paid by the government to an enterprise that benefits the public. Certainly, a family child care business benefits the public.
When you receive cash and then spend the money on items for your business, or if you receive a swing set, or anything else, you can deduct the cost of these items as business expenses. Use the regular rules for deducting business expenses. If you received cash and bought items, you can deduct them in one year if they cost less than $100. If any item costs more than $100 and is used more than 50% of the time in your business you can use the Section 179 Rule and deduct it in one year. Otherwise, you can depreciate the item using normal depreciation rules.
If you are given an item, base your deduction on the fair market value of the item at the time you received it, and depreciate it. If you received a used sofa worth $200, you can depreciate this amount over seven years.
Sometimes providers are given a grant with a stipulation that they must return the item if they go out of business within a set period of time. If this is the case, you can treat the item as though you owned it from day one, and you may begin depreciating it (or use Section 179) in the first year. If you go out of business before the stipulated time frame, you can take the rest of the depreciation as a loss in the year you quit.
Sometimes receiving a grant of money can create an extra, unplanned tax burden in the year you receive it. For example, if you received a $2,000 grant and purchase an egress window, you must depreciate such a home improvement over 39 years. You will be entitled to about a $50 deduction each year for 39 years, but you must pay tax on all $2,000 in the first year. If you go out of business after ten years, you will lose the depreciation for the additional 29 years.
When is a gift really a gift? If someone gives you something to you personally, it is a gift and is not reported as income. If it has anything to do with your business, however, it is a grant and must be reported as income.
Grants are a great way to get educational items, play equipment or other resources to help improve the quality of your business. Providers should not pass up such an opportunity. While you may end up paying more in taxes, you and your children will receive the benefit of the grant.
If you have any questions about how to deduct grants or report this income, consult the Family Child CareTax Workbook and Organizer.
This handout was produced by Think Small (www.thinksmall.org).
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