In a major smart grid development, the Internal Revenue Service yesterday released guidance (Rev. Proc. 2010-20) providing a safe harbor under which the $3.4 billion in Smart Grid Investment Grants (SGIGs) made pursuant to the American Recovery and Reinvestment Act (ARRA) will not be taxable to corporate recipients. After months of uncertainty, this determination will allow corporate recipients to finalize their grant agreements with the Department of Energy (DOE) and launch their investments without concern that they will be subject to federal taxation.
This guidance provides that the IRS will not challenge a corporation’s treatment of an SGIG as a nonshareholder contribution to the capital of the corporation so long as the corporation properly reduces the tax basis of the property it acquires with the grant (or other property owned by the corporation). Nonshareholder contributions to capital are not included in a corporation’s gross income for federal income tax purposes. This guidance is effective immediately and will allow DOE to begin finalizing grant agreements with the various utilities, private companies, manufacturers and others who have been authorized to receive these grants.
This guidance does not create a general federal tax exemption for all ARRA grants:
- The guidance applies only to SGIGs made pursuant to 42 U.S.C. 17386 by DOE for qualifying investments under the $3.4 billion Smart Grid Investment Matching Grant Program as authorized by Section 1306 of the Energy Independence and Security Act of 2007 (Pub. L. 110-140), as amended by Section 405, Division A, of the ARRA (Pub. L. 111-5).
- The guidance does not apply to Smart Grid Demonstration Grants made under 42 U.S.C. 17384.
- The guidance does not apply to other ARRA grants, such as grants made under the $4.7 billion Broadband Technology Opportunities Program (administered by the Department of Commerce’s National Telecommunications and Information Administration) or the Broadband Initiatives Program (administered by the Department of Agriculture’s Rural Utilities Service). In a letter to Treasury Secretary Timothy Geithner earlier this month, the National Association of Regulatory Utility Commissioners requested guidance on the federal tax treatment of these broadband grants.
- The guidance does not apply to any recipient that is not classified as a corporation for federal income tax purposes. Therefore, it does not apply to any recipient that is a partnership or a limited liability company treated as a partnership for federal tax purposes.
- The guidance does not apply to state taxes.
Recipients of ARRA grants that do not qualify for the safe harbor will need to consider whether those grants are taxable under other authorities. Recipients of all ARRA grants, including SGIGs, will need to consider whether they are taxable for state or local tax purposes.