An Overview of Subsidies and How It Is Taxed

What is a Subsidy?

A subsidy is a benefit granted to a person, a company, or an institution, generally by the government. This is usually a cash payment or a tax exemption. The subsidy is typically granted to eliminate a kind of burden. It generally is considered to be of general public interest, issued for the promotion of social good or economic policy.

Key Points to Note

• A subsidy is a direct or sometimes indirect payment to persons, generally in the form of a cash payment by the State or a specific tax exemption.
• Subsidies can be used to compensate for market failures and externalities for greater economic efficiency.
• However, funding critics point to problems in calculating optimal subsidies, overcoming invisible costs, and preventing the political incentives that make subsidies more expensive than beneficial.

Understanding subsidies

In the United States, Subsidies are usually in the form of payment, provided directly or indirectly, to the individual or commercial beneficiary. Subsidies are generally considered to be a preferred type of financial assistance, as they reduce an associated burden previously received by the recipient or favor a specific action by providing financial support.

A subsidy generally supports specific sectors of a country's economy. It can help struggling industries by reducing their load or encouraging new developments by providing financial support. Often these areas are not adequately supported by general economy actions or may be hindered by activities in competing economies.

Direct vs Indirect Subsidies

Direct subsidies are those that involve the actual disbursement of funds to a particular individual, group, or sector.

Indirect subsidies are those that have no predetermined monetary value or involve real cash payments. These may include activities such as price reductions on necessary goods or services that can be supported by the government. This allows you to purchase the essential items below the current market level, resulting in savings for which the grant is designed to help you.

Examples of Subsidy 

Two of the most traditional kinds of individual subsidies unemployment benefits and social assistance benefits. The purpose of this type of subsidy is to help people who are temporarily suffering from economic problems. Other subsidies, such as interest on student loans, are provided to encourage people to continue their education.

With the publication of the Affordable Care Act, several American families became eligible for health care benefits based on family size and income. These subsidies are intended to reduce the direct costs of health insurance premiums. In such cases, the funds associated with the subsidies are sent directly to the insurance company to which the dividends are due. This reduces the amount of payment requested by the family.

Subsidies are provided to businesses to support an industry that faces international competition that has driven prices down in a way that domestic operations would not be profitable without the subsidy. Historically, the vast majority of US subsidies have been allocated to four sectors: agriculture, financial institutions, oil companies, and utilities.

Taxes on subsidies

For you to be eligible for a subsidy depends on: who is making the payment to you, and the mode of payment

Specified suspensory loan and repayment

If you receive a loan with a specific suspension and do not want to repay it, the remaining amount will be considered as gross income. It is necessary to divide the unpaid amounts into three equal amounts and add them as gross income for three years. One is no longer required for annual reimbursement and the other for the next two years.

Work and income provide funds to help start businesses

Subsidies can be used for private or non-commercial purposes, but donations cannot. For tax purposes, it is essential to know what type of payment has been made.

Subsidies used for capital expenditures

If you receive a grant for the specific purpose of purchasing an asset, the grant will not be taxable for tax purposes. The amount of the subsidy will reduce the value of the asset to be depreciated.

Salary and employer benefits

When you receive a wage subsidy, such as a flexible payment for work and income, you must be registered as an employer. You will also have the responsibility of your employer, for example, to deduct PAYE.