Prizes, Awards, and Grants and Your Taxes

At just about any time of the year you can find contests targeting small businesses. Sometimes they’re called contests, sometimes grants. Usually, the results are the same—money or other benefits to your company if you win, which raises tax issues to keep in mind.

Overview of contests and grants

Each year, May is a popular month for these giveaways because of Small Business Week. But you can usually find opportunities any time of the year. Examples:

Some contests merely give winners recognition; there’s no monetary compensation. Most contests give cash, property (e.g., computers, items related to the company holding the competition), or mentoring assistance. Still other competitions are designed to raise capital—as grants or through investors. Understand the implications so you factor them into your tax payments.

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Winning cash and property prizes

It’s a basic tax rule that receiving prizes and awards are included in gross income…they’re taxable. There are some exceptions for individuals, such as Olympic medals, but businesses that receive cash, cash equivalents (e.g., gift cards), property, or anything else of monetary value are taxed on it. Don’t let the label fool you.

Whether the prize is called a grant or something else, the tax treatment for anything other than mere recognition—something that can’t be valued so it can’t be taxed—or investments is going to trigger a tax bill. For example, business plan competitions may help you get funding for starting a business or expansion, but the cash received is not a loan and not an investment; it’s just a taxable prize. Google “business plan competitions” to find what’s currently open (some are limited to students).

If an owner enters a contest, be sure to make it clear whether the entry is for the owner or the business. If the owner wins and the prize is $600 or more, a Form 1099-MISC will be generated for the owner and will need to be reported on the owner’s personal tax return.

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Getting investors

Many angel investors hold competitions for business plans and select winners in which they invest money; they don’t simply give it away. These investors—like Shark Tank panelists—may also offer expert advice and make important connections for business owners.

Investments in a business by angel investors are not taxable; they are contributions to capital. They are noted as owners’ or shareholders’ equity on the company balance sheet. They reduce the ownership interest of the founders.

To find angel investor competitions, google “angel investor competitions.” Some may not necessarily give investments; some may be cash grants or non-cash assistance. Be sure to note application deadlines and other entry terms.

Final thought

On the flip side, your business may want to hold a contest or a raffle as a marketing tool. Be sure to check with state law rules about contests and raffles that require the entrant to make a wager (i.e., buys a ticket). This may be treated as gambling.

Be sure to follow IRS rules on reporting for winners. Obtain the tax identification number—a Social Security number for individuals and an employer identification number (EIN) for businesses, which is needed for proper tax reporting. Prizes made in the course of business of at least $600 are reported on Form 1099-MISC (box 3). Prizes of property are reported at their fair market value. Raffle winnings are reported on Form W-2G.

Image: Depositphotos

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Barbara Weltman Barbara Weltman is the Tax Columnist for Small Business Trends. She is an attorney and author of J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® and is a trusted professional advocate for small businesses and entrepreneurs.

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