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New Laws—COVID-19-Related Government Grants: Taxable or Not?

Billions of dollars in grants are being doled out to individuals and businesses in the wake of the COVID-19 pandemic. The recently enacted second stimulus bill has increased these grants, including $25 billion in rental assistance for individuals, a new round of Small Business Administration (SBA) Economic Injury Disaster Loan (EIDL) advances, and new grants for shuttered entertainment venues such as movie theaters.

The good news is that, unlike loans such as SBA EIDLs, these grants don’t have to be paid back.

The bad news is that federal, state, and local grants may be taxable income to the grantee.

As a rule, government grants to help individuals after a disaster such as the COVID-19 pandemic are not taxable income under the general welfare exclusion. Thus, for example, pandemic rental assistance is not taxable income.

But grants to businesses do not come within the general welfare exclusion. Thus, they are taxable unless Congress specifically acts to exempt them.

Congress has acted with the second stimulus bill to make both EIDL loan advances and grants for shuttered entertainment venues tax-free.