A federal grant is money a federal agency gives to a state or local government, a nonprofit, a university, a business, or in some cases an individual to carry out a project that serves a public purpose, and unlike a loan it generally does not have to be paid back. Federal law defines it as a legal instrument an executive agency uses to transfer something of value, usually money, to a recipient for a public purpose rather than to buy goods or services for the government’s own use.1Office of the Law Revision Counsel. 31 USC 6304 – Using Grant Agreements That last distinction matters. A contract is how the government buys things it needs. A grant is how it funds activities it wants to encourage.
How a Grant Differs From a Cooperative Agreement
Both grants and cooperative agreements move federal money to a recipient for a public purpose. The difference is how involved the agency stays. With a cooperative agreement, the federal agency plays an active, hands-on role in the project. With a grant, the agency expects no substantial involvement in day-to-day work, and the recipient runs the project independently.1Office of the Law Revision Counsel. 31 USC 6304 – Using Grant Agreements If a funding announcement says “cooperative agreement,” expect a working relationship with the agency, not just a check.
Do You Have to Pay a Grant Back
Generally, no. A grant is financial assistance, not a loan, and you do not owe the federal treasury the money back at the end of a successful project. There are exceptions worth knowing before you accept an award. If you receive more than you were eligible for, or if you withdraw from the funded program early, the agency can require you to return the overpayment. And any grant money you received in excess of what you were entitled to becomes a debt to the federal government, subject to collection under federal debt recovery rules.2eCFR. 2 CFR Part 200 Subpart D – Post Federal Award Requirements A closed-out grant is not necessarily a closed book: an agency can still disallow costs and recover funds based on a later audit or review.
Types of Federal Grants
Federal grants come in two broad categories, and knowing which is which tells you how tightly the money is restricted and how competitive it will be to win.
Categorical Grants
Categorical grants make up the majority of federal grant programs. They fund a narrow, specifically defined activity, such as a particular type of medical research or a highway safety initiative. There are two subtypes:
- Formula grants are distributed automatically based on data like population, poverty rates, or school enrollment. Any entity that meets the criteria receives its share. There is no competition.
- Project grants are competitive. Applicants submit proposals, and reviewers score them against published criteria to decide which projects get funded.
Block Grants
Block grants provide larger sums for broader functional areas like healthcare, community development, or social services. Recipients have more flexibility in deciding how to allocate the money within the program’s general guidelines, compared to the tight restrictions on categorical grants.
Who Can Receive a Federal Grant
The federal government’s uniform administrative rules identify several categories of eligible recipients: state, local, and tribal governments; public and private colleges and universities; and nonprofit organizations. These are collectively referred to as “non-federal entities.”3eCFR. 2 CFR Part 200 – Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards Some programs also extend eligibility to small businesses, for-profit organizations, or individuals, particularly for research or artistic work. The statute authorizing a particular grant program controls who may apply, and each program’s Notice of Funding Opportunity spells out the eligible applicant types.
One boundary: an entity that has been suspended or debarred from federal awards cannot receive grants. Federal agencies track exclusions in SAM.gov, and a record of termination for noncompliance remains visible there for five years. Agencies check that database before making awards.4eCFR. 2 CFR Part 180 Subpart E – System for Award Management Exclusions
What Accepting a Federal Grant Commits You To
The check is the easy part. Federal grants come with a set of obligations that begin at application and last for years after the project ends. If you are weighing whether to pursue one, weigh these too.
Matching and Cost Sharing
Many programs require you to cover part of the project costs yourself, from non-federal sources. This is called cost sharing or matching. Your contribution can include cash, employee time, donated supplies, or other in-kind resources, as long as those contributions are documented, are not counted toward another federal award, and are reasonable and necessary for the project. For research grants specifically, agencies cannot use voluntary cost sharing as a factor during merit review unless a statute or regulation authorizes it.5eCFR. 2 CFR 200.306 – Cost Sharing
Reporting and Recordkeeping
Grant recipients submit regular financial and performance reports to the awarding agency. Financial reporting is typically done on the Federal Financial Report (Standard Form 425), with cash transaction data due quarterly and a full financial status report due annually, generally 90 days after the end of the grant period. Performance reports on the project’s progress and outcomes follow a similar annual schedule.
You must keep all financial records, supporting documentation, and statistical records related to a federal award for at least three years after submitting the final expenditure report. Records for equipment or property purchased with grant funds must be kept for three years after the property’s final disposition.6eCFR. 2 CFR 200.334 – Record Retention Requirements
Costs You Cannot Charge to the Grant
Federal cost principles identify categories of expenses that are never allowable, no matter how reasonable they might seem in context:
- Alcoholic beverages.
- Entertainment costs, including social activities, amusement, and associated gifts, unless the grant specifically authorizes them for a programmatic purpose.
- Fundraising, solicitation of donations, and investment management costs.
- Fines and penalties for violations of law.
- Bad debts, including uncollectible accounts and related legal or collection costs.
- Donations from your organization to other entities.
Charging any of these can trigger cost disallowance and repayment demands, or contribute to a finding of noncompliance.7eCFR. 2 CFR Part 200 Subpart E – Cost Principles
Audit Threshold
Any non-federal entity that spends $1,000,000 or more in federal award funds during a fiscal year must undergo a Single Audit or a program-specific audit.8eCFR. 2 CFR 200.501 – Audit Requirements That threshold was raised from $750,000 in the 2024 revisions to the Uniform Guidance, effective for fiscal years beginning on or after October 1, 2024.9U.S. Election Assistance Commission. 2024 Uniform Guidance Revisions A Single Audit examines both your financial statements and your compliance with each federal program’s requirements. Organizations spending below the threshold still have to maintain records and make them available for review; they just are not required to commission the formal audit.
What Happens If You Don’t Comply
If you fall short of the grant’s terms, whether by spending on unapproved activities, missing reporting deadlines, or violating federal regulations, the awarding agency has several remedies. It can withhold payments until you take corrective action, disallow costs and require repayment, suspend or terminate the grant in part or entirely, initiate debarment proceedings, or withhold future funding for the same project or program. A termination for noncompliance is reported in SAM.gov and stays visible for five years, which can make it very difficult to win another federal award in that period.2eCFR. 2 CFR Part 200 Subpart D – Post Federal Award Requirements
Tax Treatment
For most for-profit businesses and individuals, federal grant funds are considered taxable gross income. Unless a specific statute exempts the program, plan to report grant proceeds as income on your federal tax return.10Farmers.gov. Tax Issues for Grants Expenses you pay with grant money, such as equipment, supplies, or contracted services, are generally deductible as business expenses, which can offset the taxable income. Nonprofit organizations that hold tax-exempt status under the Internal Revenue Code are generally not taxed on grant funds that further their exempt purpose.
Where to Find Grants and What You Need Before Applying
The primary place to search for federal grants is Grants.gov, the government’s centralized listing of discretionary funding opportunities. You can search by keyword and filter by agency, eligibility type, funding category, and whether the opportunity is still open.11Simpler.Grants.gov. Search Funding Opportunities Each listing links to the full Notice of Funding Opportunity, which spells out the program’s goals, who may apply, how much funding is available, the evaluation criteria, and the deadline. Read it carefully before writing anything: proposals that do not align with the stated priorities are unlikely to score well, however strong the project itself.
Before you can submit any application, your organization needs a Unique Entity Identifier (UEI), which replaced the older DUNS Number. You get one by registering in the System for Award Management at SAM.gov, and the government generates the identifier as part of that registration.12GSA. Unique Entity ID is Here Choose the full “Register Entity” option, not the abbreviated “Get a Unique Entity ID” option, which is only for entities that do not plan to apply for federal awards. Picking the wrong one can cost you eligibility or delay an award.13U.S. Department of Education. Unique Entity Identifier Fact Sheet Your SAM.gov registration expires every 365 days and must be renewed before that date to keep you eligible.14SAM.gov. Entity Registration Set a calendar reminder. A lapsed registration has sunk otherwise strong applications.