Covid-19: How are financial aid and benefits taxed?

Many SMEs and freelancers have received aid and benefits to be able to face the economic consequences derived from covid-19. How should they pay for these aid in their personal income tax?

Benefits for cessation of activity

Few months ago, new extraordinary Social Security benefits were approved for freelancers who were forced to suspend their activity or those whose billing during the prior month of the application for the benefit was reduced by 75% in relation to the average billing of the previous calendar semester.
For tax purposes, this benefit is assimilated to the unemployment of the self-employed and, therefore, it must be declared in personal income tax as income from work (despite the fact that its beneficiary receives income from economic activities). Thanks to this qualification, it is possible to apply the expenses and reductions that the law establishes for this kind of income. Specifically, a fixed amount of 2,000 euros may be deducted as an expense.
In addition, if the net income from work is less than 16,825 euros, a reduction of up to 5,565 may be applied (without these income being negative). However, to apply this reduction it will be necessary that incomes other than work do not exceed 6,500 euros.
On the other hand, the aid consisting of the exemption in the payment of the self-employed contributions (aid to which the corporate self-employed could also avail themselves), should not be computed as income. Therefore, the affected party will not be able to compute an expense for the fees that he was not obliged to pay.

Subsidies and grants

Unlike benefits for cessation of activity, subsidies and aid are not considered income from work, although the objective may be similar to that of social security benefits (to compensate for falls in income). The reason is that they are considered not comparable to an unemployment benefit and, therefore, must be declared as one more return from economic activity.
Therefore, although the recipients are natural persons, these aid are imputed as income according to the criteria established in the corporate tax regulations:
  • If they are intended to compensate for the drop in income, they should not be reported as earned income. It is considered that they are not equivalent to an unemployment benefit and, therefore, must be declared as an additional income from economic activity.
  • If they subsidize the acquisition of any asset, they must be recognized as income on a proportional basis in the same years in which the subsidized investments are amortized.

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