By: Micki Vandeloo, President, Lakeview Consulting
When we work with clients, we research both grants and incentives, but the question sometimes comes up, “What’s the difference?”. In this article, we will discuss how grants and incentives are the same and different.
What are the Common Factors Between Grants and Incentives?
Grants and incentives are very different from each other, but there are some distinct similarities. Here are the commonalities between grants and incentives:
- Both incentivize economic development activities, including job creation and capital investment.
- Both increase your bottom-line revenue. Grants increase revenue to help offset the cost of a funded project. Incentives (typically tax credits) reduce your tax liability on the expense side.
- Both involve applications to obtain the funding.
- Both follow political and government priorities. For example, if the administration has a positive opinion on clean energy, there will be more grants and incentives to support clean energy projects.
- Both the federal government and states offer incentives and grants.
What are the Differentiators Between Grants and Incentives?
Now that you understand all of the things grants and incentives have in common, let’s exlpore the five most critical ways they are different:
- A grant doesn’t need to be paid back (unless you as the recipient don’t do what you say you will do) whereas a loan that is an incentive would need to be paid back.
- A company needs to apply for a grant and the grant needs to be approved before the proposed project starts. An incentive such as a tax credit is usually applied for after the qualifying activity takes place. For example, a company would apply for a job creation tax incentive at the end of the tax year for any qualifying new hires employed in that tax year. There are exceptions in both cases, but this is the general rule.
- A grant is typically competitive with many companies potentially applying for funding. Typically grant applications are scored by reviewers and the applications with the highest score wins. In contrast, a tax credit or loan is usually guaranteed if you perform qualifying activities and complete the application for the tax credit or loan.
- Grants tend to fund a wider variety of activities than tax credits or incentives do. For example, most states offer grants to support companies that attend foreign or large domestic trade shows to promote expanding international markets. There are no tax credit programs funding this type of activity. Training grants are another example of a grant program that doesn’t have a corresponding tax credit program in most states.
- Grant applications are usually more complex than tax credit applications at both the state and federal level.
Is a Grant or Incentive the Right Funding Option for My Company?
The answer is, it depends. But you should look into both. As grants and incentives are typically both beneficial to companies, it is highly recommended to research all options when seeking funding to support a project. That way, you have a complete picture of the funding mechanisms that can fund your next project and your overall company’s success.
Frequently Asked Questions About Grants and Incentives
Q: What is the main difference between a grant and an incentive?
A: The main difference is repayment and structure. A grant is money awarded upfront to offset the cost of a specific project and generally does not need to be repaid, as long as the recipient meets the terms of the award. An incentive — most often a tax credit — reduces a company’s tax liability after it completes a qualifying activity, rather than providing funding in advance.
Q: Do you have to pay back a grant or a tax incentive?
A: Grants typically do not require repayment unless the recipient fails to fulfill the commitments outlined in the award agreement, such as job creation or spending targets. Tax credit incentives aren’t “paid back” in the traditional sense either, but incentive programs that are structured as loans do require repayment, which is a key distinction from grant funding.
Q: Is grant funding competitive, or is it guaranteed once you qualify?
A: Grant funding is competitive. Applicants are scored against other applicants, and meeting the eligibility criteria doesn’t guarantee an award. Tax credit incentives work differently — they are usually guaranteed as long as the business performs the qualifying activity, such as hiring workers or investing in equipment, making incentives a more predictable funding source than grants.
Q: Do you apply for a grant before or after starting a project?
A: Grants require pre-approval, meaning a business must apply and be awarded funding before the project begins. Tax credit incentives are the opposite: they are typically claimed after the qualifying activity is completed, since the credit is based on documenting work that has already happened rather than proposing work that hasn’t started yet.
Q: What can grants fund that tax incentives usually cannot?
A: Grants tend to cover a broader range of business activities, including trade show participation, employee training, and other operational costs tied to economic development goals. Tax credit incentives are narrower in scope, generally limited to specific qualifying activities defined by the program, such as job creation, capital investment, or research and development.
Q: Which is harder to apply for, a grant or a tax incentive?
A: Grants are generally harder to apply for than tax incentives. Grant applications involve more extensive documentation, competitive scoring criteria, and detailed project proposals submitted before work begins. Tax credit incentive applications are typically simpler because they document activity that has already occurred and don’t require competing against other applicants for a limited pool of funds.