Is SBIR or DOE Grant Money Taxable for a Startup?

Is an SBIR grant or a DOE grant taxable income for a corporation?

Yes. An SBIR or STTR award, a Department of Energy (DOE) grant or another federal research award is gross income to the corporation that receives it. "Non-dilutive" means no shares were given up; it does not mean tax-free. It is taxed as you draw the money or incur the costs it pays, depending on your accounting method, never when the award letter arrives, and the research costs it pays stay deductible. The tax answer is the same for any agency's SBIR or STTR award, including the Department of Education's.

• Government money is not a capital contribution. A corporation excludes contributions to its capital from income, but the Code says that term does not include any contribution by a governmental entity (26 U.S.C. 118(b)(2)). That rule applies to contributions made after December 22, 2017. Older advice calling grants to corporations capital contributions is out of date.
• The IRS's general rule. State and local grants are ordinarily taxable, and a federal grant is ordinarily taxable unless the law that authorizes it says otherwise (Form 1099-G instructions, box 6). The SBIR and STTR statute contains no such exclusion. Check the wording of any other program's law before treating an amount as tax-free.
• No form, still income. An agency files Form 1099-G for some taxable grants (box 6), and reports contract payments for services on Form 1099-NEC even to a corporation (Form 1099-NEC instructions). The award is income whether or not a form arrives.

Cases get harder with drawdowns across December 31, advances, equipment or a Canadian affiliate. Gather the award document, the payment terms, every drawdown or invoice with its date, and the cost report behind it.

Is our SBIR award a grant or a contract, and does it change the tax?

Both are taxable. The type changes where the income goes on Form 1120, which cost rules apply, and who owns equipment.

Each agency chooses the type of funding agreement: a contract, a grant or a cooperative agreement (SBIR/STTR Policy Directive, 3(r) and 7(g)). DOE issues its SBIR and STTR awards as grants or cooperative agreements under its own terms (DOE general terms). Other agencies often use fixed-price or cost-type contracts. Your award document names the type.

The Form 1120 instructions name grants on neither line, so the table shows common practice. Agencies must pay a reasonable fee or profit on SBIR and STTR awards (Policy Directive 7(g)(2)). That fee is income too.

When is SBIR or grant money taxed: at award, at drawdown, or as we spend it?

Never at award. The award letter and the obligated amount are not income. The year depends on your accounting method and the award's payment terms (Publication 538).

• Cash method. Income is taxed when received, or when made available to you without restriction. Money is not constructively received if your control of it is subject to substantial restrictions (Publication 538). An obligated balance you may draw only for allowable costs is generally not received just because it sits in an agency payment system.
• Money advanced before you spend it. Advance payments are optional under SBIR rules (Policy Directive 7(f)). An advance under a contract is generally income when received; an accrual-method company can elect to defer the part not yet earned, but no further than the next tax year (Publication 538). For a grant advance you must return if unspent, no single published rule covers it; the year turns on your method and the award terms, so get advice before you file.

Phase I and Phase II periods often cross December 31. Income follows draws or costs in each tax year, not the award total. A corporation can use the cash method only while its average annual gross receipts stay at or under $32,000,000; for the switch, see Switching from cash to accrual accounting.

Can we still deduct the research costs the grant paid for?

Yes. Because the grant is income, the costs it pays keep their normal treatment. Research and development done in the US is deductible in the year paid or incurred under section 174A (Rev. Proc. 2025-28).

SBIR and STTR work must be done in the US, unless the agency approves part of it abroad (Policy Directive 6(a)(4)). Approved work abroad is foreign research and is spread over 15 years. Payments to an STTR research partner, such as a university, are costs of research done for you. For the election to amortize US research instead, and for research done abroad, see Deducting software development done abroad.

Funded research generally cannot support a federal research credit: research funded by a grant, contract or a governmental entity is excluded (26 U.S.C. 41(d)(4)(H)).

Whose research is it when an agency pays for it?

Usually the startup's, under the IRS's interim test, when the startup keeps rights to use the results: the costs are yours even though an agency pays. That test says a research provider's costs are its own research expenditures if it bears financial risk if the research fails, or has a right to use the result beyond performing the contract (Notice 2023-63, section 6, as modified by Notice 2024-12).

• A small business can elect to keep title to inventions made under a federal funding agreement (35 U.S.C. 202(a)), unless the agreement provides otherwise in limited cases. It must disclose each invention to the agency and elect in writing within two years after that disclosure, sooner if a patent filing bar is closer, unless the agency allows more time (35 U.S.C. 202(c)).
• SBIR and STTR data rights protect your data for at least 20 years from award (Policy Directive 3(hh)).

So SBIR-funded costs are normally the startup's own research costs. If all the award work is in the US and you deduct research costs in the year paid, the label changes nothing that year; it matters for approved work abroad and if you elect to amortize.

The uncertainty: Notice 2023-63 and Notice 2024-12 were written for the earlier section 174 rules. Rev. Proc. 2025-28 does not carry section 6 over to section 174A, and no regulations under either section had been proposed when this page was checked.

Who owns, and depreciates, equipment bought with award money?

It depends on the award type.

• DOE grant. Title vests in the recipient, subject to the award's conditions on use and disposal (2 CFR 910.360(b)). Because the grant was income, the startup depreciates the equipment on its full cost (Publication 946). Equipment costing $5,000 or more per unit needs the contracting officer's prior written approval, unless the award terms expressly allow it (2 CFR 910.360(a)). When the project no longer needs a unit still worth $5,000 or more, keeping it generally means paying DOE its share of the current value; otherwise you follow DOE's disposal instructions (2 CFR 910.360(g)).
• Cost-reimbursement contract. Title to property bought as a direct cost passes to the government when the vendor delivers it (FAR 52.245-1(e)(3)). You generally must own property to depreciate it, so its cost is a cost of performing the contract instead.
• Fixed-price contract. The contractor generally keeps title to property it buys for the contract, except deliverable items, unless the contract's financing terms say otherwise (FAR 52.245-1(e)(2)).

Will the grant make us owe tax in a year we lose money?

Not if your deductible costs exceed the award and your other income. Then the grant shrinks the loss carried forward rather than creating tax now. The cost comes later: a profitable year can offset only 80% of taxable income with carried losses; see How C corporations are taxed. On the accrual method, a timing gap can still produce taxable income in one year.

Do states tax the grant too?

Generally yes. Many states start from federal taxable income, so the grant flows through. California moved its conformity date to January 1, 2025 for tax years beginning on or after that date, and its analysis lists the federal contributions-to-capital change among the provisions adopted (FTB conformity; SB 711 analysis). Check any state tied to an older version of the Code. State grants, such as SBIR matching programs, are ordinarily taxable federally too (Form 1099-G instructions).

What must our books track for a grant or contract award?

Each award as its own project, with costs you can prove. Federal assistance recipients must keep records showing each award's amount, source and spending, compare spending with budget, and have written procedures for deciding which costs are allowable (2 CFR 200.302). DOE makes companies follow the contract cost principles (2 CFR 910.352). An agency may award a cost-reimbursement contract only when your accounting system is adequate for determining the contract's costs (FAR 16.301-3).

In practice, set up:

• a separate project or class for each award;
• direct costs charged to that project, with indirect costs pooled;
• timesheets for everyone who charges the award;
• unallowable costs in their own accounts, kept out of every bill (FAR 31.201-6);
• an equipment register;
• a grant receivable, or deferred grant revenue for money received ahead of spending, at year-end.

Book revenue timing can differ from tax timing; Schedule M-1 or M-3 of Form 1120 reconciles the two. For help setting this up, see bookkeeping; for who keeps the books, see Doing your own books or hiring a bookkeeper.

Outside this page: grant applications and budgets, indirect rate proposals, pre-award accounting system reviews, agency audits, DOE's compliance audit for recipients with large DOE spending, research credit claims, data rights and export controls.

Example

Illustrative only, in US dollars. Each is a calendar-year C corporation.

A liquid cooling startup with a Phase I grant and a loss

A Boston startup building cold plates and coolant distribution units wins a $200,000 DOE SBIR Phase I grant. It spends $1,400,000 on US engineers and prototype cold plates, including the grant project, and has no other income. The $200,000 is income, and the $1,400,000 is deducted under section 174A. The loss is $1,200,000 instead of $1,400,000. No tax is due now, but $200,000 less loss is left to offset future profits.

A power electronics startup with draws across year-end

An Austin startup building solid-state transformers for data center power holds a $1,100,000 DOE SBIR Phase II grant paid as reimbursement. It pays $500,000 of allowable project costs and draws $380,000; the $120,000 for December costs arrives in January.

• Cash method: $380,000 of income this year against the $500,000 deduction, and $120,000 of income next year.
• Accrual method: generally $500,000 of income this year.
• Books: a $120,000 grant receivable at December 31.

A chip startup with a cost-plus contract

A San Jose startup building optical interconnect chips holds a $1,700,000 cost-plus-fixed-fee SBIR Phase II contract from the Department of Defense, including a $100,000 fee. The $900,000 billed and paid this year is gross receipts on line 1a. A $150,000 probe station bought as a direct contract cost belongs to the government on delivery, so the startup does not depreciate it. Bought under a DOE grant, the same probe station would belong to the startup, subject to the award's conditions, and the startup would depreciate it. The startup elects to keep title to its inventions, so under the IRS's interim test its US research costs are generally its own and deducted this year.

How do US awards compare with Canadian funding such as IRAP?

The two countries treat government funding in opposite ways. A Canadian startup under a Delaware parent can hold both kinds.

Different for you?

• Investors or founders put money in, not an agency: that is equity or a loan, not income. See Putting money into your US corporation from abroad.
• You also raised on SAFEs or convertible notes: see SAFEs and convertible notes.
• Part of the award work is done abroad, or you want to amortize: see Deducting software development done abroad.
• You build prototypes, test boards or tooling: see Deducting hardware research and prototypes.
• You have carried-forward losses or a new investor round: loss limits and ownership changes are in How C corporations are taxed.
• Your receipts passed the cash-method limit, or investors want accrual books: see Switching from cash to accrual accounting.
• You build equipment under a fixed-price contract past year-end: see Long-term contracts for custom equipment.
• You perform contract research in Washington, Ohio or Oregon: see Gross receipts taxes in other states.
• Your Canadian subsidiary or parent receives IRAP or other assistance: see IRAP and other government funding.
• Advance drawdowns, equipment under a contract, or awards in both countries: the year and treatment turn on the award terms. Get help with data center and hardware startup tax.
• You need award-ready books: see bookkeeping.