TLDR
Program income is income earned from grant-supported activities during the award period. It must be tracked, reported on the SF-425, and applied according to the treatment method in the grant agreement. Unreported program income is a compliance finding even if the money was used appropriately.
Program income is the category of grant compliance that most organizations undercount or misreport — not because they intend to, but because the definition is broader than it sounds at first.
“Income from the grant” sounds like the grant itself. But program income means income from activities supported by the grant — the service fees, the admission charges, the proceeds from what the grant funded you to produce. If the grant is what enabled the activity, and the activity generates income, that income is program income.
When program income applies
The 2 CFR 200.307 definition has a few key terms worth unpacking.
“Gross income” means the full amount received — not net of expenses. If a grant-funded training program charges participants a $50 registration fee and the program costs the organization $30 per participant to deliver, the program income is $50, not $20.
“Directly generated by” means there must be a causal connection between the federal award and the income. Unrestricted individual donations received during the grant period are not program income. A participant fee from a grant-funded program is.
“During the period of performance” means program income obligations are time-limited. Income earned after the award period ends is generally not subject to federal program income requirements — unless the grant agreement says otherwise.
The three treatment methods
How program income is treated affects your budget and your drawdowns. The three options:
Deduction method (default). Program income is subtracted from total allowable project costs. If the project budget is $200,000 and the organization earns $10,000 in program income, total allowable costs become $190,000. The organization may draw down only $190,000 from the federal award. This method reduces federal exposure but also reduces the organization’s total available resources for the grant.
Addition method. Program income is added to the total project resources. If the project budget is $200,000 and the organization earns $10,000 in program income, it may spend $210,000 on the grant’s purpose. This expands the organization’s capacity to deliver program services. The addition method must be specified in the grant agreement — it is not the default.
Cost-sharing method. Program income is applied to satisfy the organization’s non-federal matching requirement. This is useful when the grant requires the organization to provide a portion of program costs from non-federal sources. If the match requirement is $20,000 and the organization earns $10,000 in program income, the match obligation decreases to $10,000.
The grant agreement specifies which method applies. If no method is specified, the deduction method governs by default.
The SF-425 reporting requirement
Program income must be reported on the SF-425 Federal Financial Report. The SF-425 has a designated field for program income earned during the reporting period and program income applied. Leaving this field blank when program income was earned is a compliance error.
This is where many organizations get caught. Staff who manage the grant program know about the service fees or participant charges. Finance staff who prepare the SF-425 may not know the program generated income unless someone communicates it explicitly. Build a process for program staff to report program income to finance at each SF-425 reporting period. The communication step is the most common gap.
What unreported program income looks like at audit
An auditor testing compliance with 2 CFR 200.307 will look for program income by reviewing the grant-supported activities and asking whether any of those activities generated income. If the SF-425s show zero program income but the grant-funded program clearly charged service fees, the auditor will investigate.
The finding is not necessarily that the money was misused. It may have been used perfectly appropriately — applied to the grant purpose, benefiting the program. The finding is that the income was not reported and not formally applied under the required treatment method. The auditor may then require retroactive application of the deduction method, reducing allowable drawdowns retroactively and potentially creating a repayment obligation.
Reporting program income accurately, even when the amount is small, is simpler than explaining why it was not reported.
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Source: Code of Federal Regulations, 2 CFR Part 200.307(e)(1)
Q&A
What is program income in federal grants?
Gross income earned by the grantee from activities supported by the federal award during the period of performance. Examples: service fees from grant-funded programs, rental income from grant-funded facilities, and proceeds from items produced under the grant.
Q&A
What are the three program income treatment methods?
The deduction method (default): program income is deducted from total allowable costs, reducing federal drawdowns. The addition method: program income is added to the grant budget, allowing more total spending on the grant purpose. The cost-sharing method: program income satisfies the non-federal matching requirement. The grant agreement specifies which method applies.
Q&A
Is insurance reimbursement program income?
Yes, if the patient services generating the reimbursement are supported by the federal grant. Insurance reimbursements — Medicaid, Medicare, private insurance — for services delivered under a federally-funded health or social services grant are typically program income and must be reported on the SF-425.
Q&A
What happens if program income is not reported?
Failure to report program income is a compliance finding under 2 CFR 200.307. Depending on the amount and circumstances, the awarding agency may require the grantee to retroactively apply the deduction method, reducing allowable drawdowns. In more serious cases, unreported program income that was not applied in accordance with the required treatment method may be considered a misuse of federal funds.
Q&A
When does program income stop being subject to federal requirements?
Program income earned during the period of performance is subject to 2 CFR 200.307 requirements. Program income earned after the award period ends is generally not subject to federal requirements unless the grant agreement specifies otherwise.
Frequently asked