Most of the big federal COVID-19 relief grants are not taxable to the business that received them, but plenty of other pandemic aid is. Whether COVID grants are taxable income to a business comes down to a single question: did Congress pass a law specifically excluding that program from gross income? Paycheck Protection Program forgiveness, EIDL advances, Restaurant Revitalization Fund grants, and Shuttered Venue Operators Grants all got that exclusion. Provider Relief Fund payments, Coronavirus Relief Fund pass-through grants, and the great majority of state and local business grants did not, and are taxable under the general rule.
The Default Rule for Government Grants
The Internal Revenue Code defines gross income as income from all sources unless a specific provision says otherwise.1Office of the Law Revision Counsel. 26 USC 61 Gross Income Defined A grant to a business increases wealth with no obligation to repay, so it lands inside that definition by default. The IRS has said this plainly: receipt of a government grant by a business is generally not excluded from gross income and is therefore taxable.2Internal Revenue Service. CARES Act Coronavirus Relief Fund Frequently Asked Questions
A grant escapes tax only when Congress writes an exclusion. During the pandemic, Congress did that for a short list of programs and left the rest alone. So the working question for any relief dollar you received is narrow: is this program on the excluded list, or not?
Federal Grants That Are Not Taxable
Four major federal programs were specifically excluded from gross income. For each, the same statute also preserved full deductibility of the wages, rent, and other business expenses paid with the funds, and preserved basis and other tax attributes. The money came in tax-free and the expenses still count as deductions.
PPP Loan Forgiveness
Forgiven PPP loan amounts are not included in gross income. The COVID-Related Tax Relief Act of 2020, enacted as part of the Consolidated Appropriations Act, 2021, confirmed the exclusion and reversed the earlier IRS position that would have disallowed deductions for expenses paid with forgiven funds.3Internal Revenue Service. Rev. Proc. 2021-49 This applies to every business structure.
EIDL Advances
EIDL advances are often mistaken for taxable income. They are not. Section 278(b) of the COVID-Related Tax Relief Act excluded Emergency EIDL Grants and Targeted EIDL Advances, and Section 9672 of the American Rescue Plan Act excluded Supplemental Targeted EIDL Advances.3Internal Revenue Service. Rev. Proc. 2021-49 All three flavors get the same treatment: no inclusion in income, no denied deductions, no basis reduction.
The underlying EIDL loan is a separate matter. The loan principal was debt, not income, so it was never taxable to begin with. Repayment produces nothing to report. Any separately negotiated forgiveness on the loan itself would be governed by the terms of that specific arrangement.
Restaurant Revitalization Fund
Section 9673 of the American Rescue Plan Act excluded Restaurant Revitalization Fund grants from gross income, again with deductions and basis preserved.3Internal Revenue Service. Rev. Proc. 2021-49 Eligible food and beverage businesses do not report RRF grants as income.
Shuttered Venue Operators Grants
Section 278 of the Consolidated Appropriations Act excluded SVOG funds from gross income.4Office of the Law Revision Counsel. 15 U.S. Code 9009a – Grants for Shuttered Venue Operators Live venues, theaters, and similar operators that received SVOG money owe no federal income tax on those amounts.
Federal, State, and Local Grants That Are Taxable
Every COVID relief program Congress did not specifically address stays under the default rule. That covers a lot of money.
Provider Relief Fund Payments
The Provider Relief Fund, administered by the Department of Health and Human Services, distributed billions to healthcare providers. Those payments are taxable. The IRS has stated directly that Provider Relief Fund payments are includible in gross income, and that the general welfare exclusion under Section 139 does not apply to payments made to a business.5Internal Revenue Service. Frequently Asked Questions About Taxation of Provider Relief Payments Healthcare businesses should have reported the funds as income in the year they were received or became available for use.
Coronavirus Relief Fund Pass-Through Grants
Many states and localities used their federal Coronavirus Relief Fund allocations to stand up grant programs for local businesses. Those grants are taxable to the recipient. The IRS has confirmed the point.2Internal Revenue Service. CARES Act Coronavirus Relief Fund Frequently Asked Questions Federal origin of the money does not create an exclusion.
State and Local Business Grants
Grants funded by state or local revenue follow the same default. A city or state program is taxable federally unless a federal statute excludes it, which almost never happens for state-originated funds. Businesses that collected several small city or county grants during shutdowns should treat all of them as taxable income unless they can point to a specific statutory exclusion.
State Income Tax Treatment
The federal exclusions do not automatically carry over to your state return. It depends on how your state’s tax code connects to the Internal Revenue Code. States with rolling conformity adopted the federal exclusions as they were enacted. States with static conformity link to the federal code as of a fixed date and have to pass their own legislation to pick up newer changes. Most states eventually conformed to the PPP exclusion, some lagged, and a few never fully conformed to every exclusion.
For grants that are taxable federally, such as Provider Relief Fund payments or CRF pass-through grants, state treatment is easier to predict: if the amount is in your federal gross income, it flows into your state taxable income too. Businesses in states with no income tax have no state layer to worry about.
How to Report the Grant on Your Return
Taxable grants go into income on whatever form your business already files. Sole proprietors add them to gross receipts on Schedule C. Partnerships report on Form 1065, S-corporations on Form 1120-S, and C-corporations on Form 1120.
Excluded grants are handled differently. The amount stays out of gross receipts, but you still deduct the expenses paid with the funds as ordinary business deductions. Revenue Procedure 2021-49 provides the mechanics for partnerships and S-corporations.3Internal Revenue Service. Rev. Proc. 2021-49 These entities report the excluded amount as tax-exempt income, which passes through to partners or shareholders and increases their basis.
Basis matters. For S-corporation shareholders, the IRS confirms that tax-exempt income increases stock basis.6Internal Revenue Service. S Corporation Stock and Debt Basis Basis determines how much you can take out tax-free and how much loss you can deduct. A significant excluded grant should have increased your basis by that full amount. Partnerships apply a parallel rule under Rev. Proc. 2021-49.
You do not file a separate form to claim the exclusion. It appears as a reconciling item: on a corporate return, on Schedule M-1 or M-2; on a partnership or S-corporation return, on Schedule K flowing to each K-1. Keep records that tie the excluded grant to the specific expenses it funded.
Fixing a Return That Treated a Grant the Wrong Way
If you reported an excluded grant as taxable, you overpaid and can amend. If you left a taxable grant off the return, you underpaid and should correct it before the IRS finds the gap. Either way, the vehicle is an amended return: Form 1040-X for a sole proprietor, or the amended version of the applicable business return.
The refund deadline is generally three years from the original filing date or two years from the date the tax was paid, whichever is later. For 2020 and 2021 returns, that window is closing or already closed for many filers. If you think you overpaid by pulling an excluded grant into income, move quickly.
There is no equivalent grace period on the other side. The IRS can assess additional tax, add a late-payment penalty of 0.5% per month up to 25% of the unpaid amount, and charge interest that compounds daily at the federal short-term rate plus 3%.7Internal Revenue Service. Topic No. 653 – IRS Notices and Bills, Penalties and Interest Charges Voluntary correction almost always costs less than waiting for a notice.