From what I know, which is very little, as I am not anywhere close to knowledgeable enough on this, grants are reportable income. It's taxability is offset by the tax deductible expenses the grant is used to pay for. If the expense is not tax deductible, then the relevant grant amount is taxable income to the recipient.
Overall, how you deal with it depends on what the grant was specified for, and what the funds were actually used for in detail.
