Grants and taxes

Should I Accept a Grant?

By Tom Copeland. Published with permission.

The answer to this question seems simple enough - Yes!

Unfortunately, when some family child care providers hear that they will have to report the grant as income they are reluctant to apply for it. Here's why this thinking is wrong.

You must report as income on IRS Form Schedule C any grant you receive. This includes cash, training vouchers, or equipment. It's all income whether you buy the toys or equipment yourself or you never see the money and the grant agency has them delivered to your home.

Normally, when your income goes up, your taxes go up. However, when you use the grant to purchase items for your business, you can deduct these as business expenses and will probably wipe out most, if not all of your income. As a result, you may not pay any more in taxes because of the grant.

Examples

Let's look at several examples:

If you used the grant money to buy items that are used 100% for your business, you can deduct 100% of the cost and you won't pay any more in taxes.

$150 worth of small toys used 100% for business = $150 business deduction

$1,000 playground equipment used 100% for business = $1,000 business deduction using the Section 179 rule.

If you use the grant money to buy items that are used by your business and your family, you can deduct the Time-Space % of the cost.

Let's assume your Time-Space % is 40% for these examples.

$150 worth of small toys used by business and family = $150 x 40% = $60 business deduction. You will owe taxes on $90 ($150 grant income - $60 business expense).

$1,000 playground equipment used by business and family = $1,000 x 40% = $400. You can used the 50% bonus depreciation rule to claim a $228 business deduction (see the calculation here). You will owe taxes on $772 ($1,000 grant income - $228 business expense). You will be able to claim the remaining $172 ($400 - $228) in business deductions over the next 6 years.

Taxes

Should you turn down a grant because it might raise your taxes? No!

In the second set of examples above the provider will owe taxes on $90 or $772. If your tax bracket is 30% your additional tax is $30 for the toys or $241 for the plaground equipment. So, you paid $30 in taxes for $150 worth of toys. That's still a deal!

As you depreciate the playground equipment over the next 6 years you will reduce your taxes by $51 ($172 x 30%), so your final tax bill is $190 ($241 - $51). It cost you $190 to get a $1,000 swing set. Still a deal!

Conclusion - don't let the prospect of maybe paying a little more in taxes cause you to not apply for a grant. Grants are a good thing!
Image credit: www.nammfoundation.org

Posted by Tom Copeland at 02:40 PM in Record Keeping & Taxes | Permalink

www.tomcopelandblog.com