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The information contained here has been prepared by Civitas Strategies Early Start and is not intended to constitute legal, tax, or financial advice. The Civitas Strategies Early Start team has used reasonable efforts in collecting, preparing, and providing this information, but does not guarantee its accuracy, completeness, adequacy, or currency. The publication and distribution of this information is not intended to create, and receipt does not constitute, an attorney-client or any other advisory relationship. Reproduction of this information is expressly prohibited.
How Does Relief Funding Affect Your Taxes?
Updated 8.1.2022
(Download a PDF version of this guide here.)
How Does Relief Funding Affect Your Taxes?
Both the Commonwealth of Virginia and the US federal government dedicated many resources to support child care programs through the COVID-19 pandemic. Relief funding saved many businesses from permanent closure — perhaps even your own.
While these relief funds were highly needed and well-used, many child care business owners have wondered how this funding will affect their taxes. Different relief funding programs will have varying impacts on your federal and state taxes because funding sources are governed by different tax laws. Also, the Commonwealth of Virginia has set some regulations on how to file your state taxes, which differ from the federal standard.
After reading this guide, you will be able to:
Recognize key relief programs and their general tax implications,
Identify the general impacts of relief programs on 2022 tax filings, and
Use this information as a resource as you prepare to file your taxes.
This information is intended to serve as one of many resources in your toolkit. It does not substitute for, nor should it be construed as personalized advice from a tax preparer.
State Relief Programs
Most state relief programs, including the Virginia ARPA Child Care Stabilization Grants, provide funding to cover costs you have already paid or will need to pay soon. Basically, the state’s intent is for the funds to reimburse you for your costs.
However, you must report the funds as income on your federal taxes in the year that you receive the payment. This means that the federal government will tax your grant money at your federal income tax rate. Because you will need to pay taxes on relief funds, your tax bill will most likely increase; however, this can be offset by claiming expenses paid for by the grant as a business deduction.
Let’s look into the upsides of relief funding in the tax process:
First, federal taxes on relief funds do not affect how greatly you are taxed on your earned income; the additional tax money you are paying is being taken out of the funds you received from the grant.
Second, expenses covered by the grant continue to qualify as a deduction. Let’s look at an example case.
Example:
Example: Ashley was eligible for the Virginia ARPA Child Care Stabilization Grant in 2021 and she received a total of $5,400 in support, however some of the payments were made in 2022. Ashley allocates the money to her rent and utilities.
When Ashley does her 2022 taxes, she can still report rent and utilities as expenses — they qualify as eligible deductions. This means that Ashley is reducing her tax burden by deducting eligible expenses, even though those expenses were paid from relief funds rather than Ashley’s earned income.
Ashley’s earned income is $70,000. As a single filer in 2022, Ashley would owe the federal government $11,148 in taxes if she did not receive a grant.
However, Ashley needs to add the additional relief grant she received to her income. Ashley adds the $5,400 in relief funds to her taxable income.
Now, Ashley’s total income is $75,400. Since Ashley is in the 22% federal tax bracket, she is taxed an additional $1,254 on the $5,400 relief grant, which increases her federal tax bill from $11,148 to $12,402.
Although Ashley’s federal tax bill did increase by $1,254, Ashley was able to directly put $4,146 of the VA Child Care Grant toward her expenses. Ultimately, Ashley ended up with more money than she otherwise would have and was able to reduce her tax burden using relief-funded deductions. The receipt of VA ARPA Child Care Stabilization Grant funds allowed Ashley to help her business and her family.
Paycheck Protection Program Loans For 2021 Filings
If you received a Paycheck Protection Program (PPP) loan in 2021, the federal tax implications are different. Neither the loan revenue nor forgiveness should be included on your federal tax return. The income and forgiveness on your PPP loan is not taxed and you can take the expenses as a deduction.
There is one important exception when it comes to filing your state taxes. The Virginia Department of Taxation limits the federal deduction for business expenses funded by forgiven PPP loan proceeds to $100,000. This means that if you received a large PPP loan in 2021 and used more than $100,000 for business expenses, you may only claim a deduction of $100,000 on your Virginia state tax return
Employee Retention Tax Credit & Families First Coronavirus Response Act
You may have received the Employee Retention Tax Credit (ERTC) and/or the Families First Coronavirus Response Act (FFCRA) to help reimburse payroll expenses that you maintained while your business operations were impacted by the pandemic. Both the ERTC and FFCRA are refundable tax credits meant to offset wages that your business paid out.
Funds received from the credit(s) are not taxable and will not be included in your gross income for federal or state tax purposes. If you received the credit(s) for staff wages, you will subtract the amount received from your total wages expense because these funds cannot be deducted. These tax credits can be claimed through 2024 by amending your previous filings. However, you must also amend to reduce your staff wage expenses from those years.
In-Kind Supplies
If you received in-kind gifts of tangible supplies (rather than money to buy the supplies), you most likely will not face a tax liability. Consult with your accountant or tax preparer to deter- mine the best way to record the donation.
Economic Injury Disaster Loans & Other Small Business Administration Loans
The Economic Injury Disaster Loan (EIDL) provided funds to help businesses through the COVID-19 pandemic. The EIDL had two components.
First, the EIDL advanced a grant to the recipient of up to $10,000. This advance is not taxable and should not be included in your revenue on your taxes.
Second, the EIDL included an option for a loan. If you took on a EIDL loan, it is considered business debt. The debt is not deductible or taxable, but you can deduct your interest payments. On your federal tax return, expenses paid using EIDL funding can be itemized as deductions. For your Virginia state tax returns, expenses paid using EIDL funding cannot be claimed as a deduction.
Getting Ready for Tax Time
If you received pandemic relief funds, it has likely been — and will continue to be — critical to your child care business’s financial operations and recovery. Even though this support can increase your tax liability, the new income which it offers you is valuable.
The best way to prepare for this taxation is to organize your expense documentation (receipts, payroll, etc.) and differentiate the sources of income used to pay for your potential deductions for federal vs. state purposes. This is because what you are allowed to deduct may vary for your federal vs. state tax filings. You should then set aside an amount of funds equal to your marginal tax rate so that you are prepared to pay any owed tax. If you are unsure, you can use 22%, which is the most common tax rate in the US.
To see the chart in a larger version, download Tax Treatment by Funding Source.
Getting Ready for Tax Time
If you received pandemic relief funds, it has likely been — and will continue to be — critical to your child care business’s financial operations and recovery. Even though this support can increase your tax liability, the new income which it offers you is valuable.
The best way to prepare for this taxation is to organize your expense documentation (receipts, payroll, etc.) and differentiate the sources of income used to pay for your potential deductions for federal vs. state purposes. This is because what you are allowed to deduct may vary for your federal vs. state tax filings. You should then set aside an amount of funds
equal to your marginal tax rate so that you are prepared to pay any owed tax. If you are unsure, you can use 22%, which is the most common tax rate in the US.
| FUNDING SOURCE | TAX TREATMENT REVENUE | TAX TREATMENT DEDUCTIONS | |
|---|---|---|---|
| Federal | Virginia State | ||
| 2021 Virginia Child Care Stabilization Grant (formerly referred to as CARES Grants) | Included Taxable |
Expenses are deductible | Expenses are deductible |
| Rebuild Virginia Grants | Included Taxable |
Expenses are deductible | May claim a maximum deduction of $100,000 in expenses |
| Paycheck Protection Program (PPP) | Not included Not taxable |
Expenses are deductible | May claim a maximum deduction of $100,000 in expenses |
| Employee Retention Tax Credit (ERTC) | Not included Not taxable |
Expenses are deductible but must be reduced by the amount of the credit received |
Expenses are deductible but must be reduced by the amount of the credit received |
| Families First Coronavirus Response Act (FFCRA) | Not included Not taxable |
Expenses are deductible but must be reduced by the amount of the credit received |
Expenses are deductible but must be reduced by the amount of the credit received |
| Economic Injury Disaster Loans (EIDL) & Other Small Business Administration (SBA) Loans |
Not included Not taxable |
EIDL Advance (Grant): • Expenses are deductible |
EIDL Advance (Grant): • Expenses are not deductible |
| EIDL Loan & SBA Loans: • Expenses are deductible • Debt is not deductible • May deduct interest payments including interest payments and fees |
EIDL Loan & SBA Loans: • Expenses are not deductible • Debt is not deductible • May deduct interest payments including interest payments and fees |
||
| All other stimulus programs | Included and taxable | Expenses are deductible | Expenses are deductible |