Many small business owners in Texas rely on loans and grants to keep their operations running, especially during times of uncertainty or growth. These funds can provide essential support. But once the money hits your account, it’s important to think about taxes. Not all funds are treated the same way. Failing to report them correctly could lead to penalties down the line.
Being aware of the tax implications of business loans and grants helps you stay ahead and avoid unwanted surprises during tax season.
Business Loans: What Is and Isn’t Taxable
If you take out a business loan, the amount you receive isn’t counted as taxable income. That’s because it’s not money you earned—it’s money you’re expected to pay back. Whether you borrow from a bank, a private lender, or a government-backed program, the loan itself isn’t income.
However, things can change if part of the loan is forgiven. When that happens, the IRS may treat the forgiven portion as income. A clear example was during the COVID-19 pandemic, when Paycheck Protection Program (PPP) loans were forgivable under certain conditions. Congress passed a law to make forgiven PPP loans tax-free, but that was a special case.
Outside of such programs, if any part of your loan is canceled, that portion could become taxable. And even if your business is in Texas—where there’s no state income tax—this forgiven amount may still factor into your federal tax return.
On the other hand, the interest you pay on a business loan is typically tax-deductible. As long as the money is used for business-related expenses, interest payments can be written off, which helps reduce your taxable income.
It’s also worth noting that while Texas doesn’t tax income, businesses still need to report their revenue to the state for Franchise Tax purposes. If loan forgiveness affects your revenue totals, it could change your state tax filing.
Grants: Almost Always Taxable
Unlike loans, most grants are treated as taxable income. This includes many government-issued grants—whether from local, state, or federal sources. If your business receives a grant to help cover costs, that money will likely need to be reported as part of your gross income on your federal tax return.
Let’s say your business receives a $10,000 grant from a local economic development program. That entire amount is typically taxable. Even if you use the grant for valid business expenses—like rent, payroll, or equipment—the money you received still counts as income.
The good news is, if you use a grant to pay for deductible business expenses, you can still claim those expenses. In effect, the grant is counted as income, and the related expense is deducted separately. But you must report both properly.
In Texas, grants may also affect your Franchise Tax filing. The Texas Comptroller considers total revenue when calculating what you owe. That means grant income could increase your reported revenue, even if it doesn’t change your income tax situation.
Reporting Matters: Why Recordkeeping Is Key
When dealing with loans and grants, accurate documentation makes all the difference. You need to know:
- What the money was used for
- How much (if any) was forgiven
- Whether the funds came with conditions or restrictions
Keeping records like approval letters, bank statements, and spending logs helps ensure you report income and deductions properly. It also makes it easier to answer questions if your return is reviewed.
Good recordkeeping doesn’t just help with audits—it also helps you avoid mistakes when preparing your return.
IRS and Texas Franchise Tax: What to Know
While Texas doesn’t tax personal or corporate income, it does have a Franchise Tax that applies to most businesses operating in the state. This is a tax on revenue—not income—so even tax-exempt funds at the federal level could affect your Texas filing.
If you received a grant or had a loan forgiven, that amount might increase your total revenue. This, in turn, could push your business into a higher reporting threshold. It’s important to consider both federal and state tax effects before assuming a fund is “non-taxable.”
Avoiding Mistakes with Business Funding
It’s easy to treat all funding the same, but that’s where small mistakes can turn into big problems. Be careful when reporting grants and forgiven loans on your tax return. Don’t leave out details, and don’t assume the IRS will overlook errors.
If you’re unsure whether funds are taxable, or how they should be reported, ask before filing. The safest approach is to stay informed, keep your records in order, and check the rules for every funding source you use.
Work With Deligans Tax Partners, LLC
Knowing the tax implications of business loans and grants can help you make smarter decisions for your business. At Deligans Tax Partners, LLC, we help Texas business owners stay organized and compliant with both federal and state tax requirements. We’ll help you sort through the tax side of your funding—whether it involves grants, loans, or preparing your return with accuracy and care.
We offer individual tax preparation, business tax preparation, business and tax consulting, and bookkeeping services—all designed to help your business stay in control of its finances.
Visit Deligans Tax Partners LLC to learn how we can help you report your funding the right way.