A State Grant

A State Grant

January 01, 2009 | By Keith Martin in Washington, DC

A state grant did not have to be reported as income.

A company agreed to expand its business in a state by buying another building with help from a state fund set up to encourage economic development in the state.

Grants must normally be reported as taxable income, but the US tax code makes an exception in cases where the grant can be viewed as a capital contribution to a corporation by someone who is not a shareholder. The IRS ruled privately that the grant was such a capital contribution by the state. Corporations do not report capital contributions as income.

The key for the IRS was that the state fund was looking for a general public benefit in return: expanding the company’s operations would bring new jobs to the state. The money was used by the company to make a capital investment rather than to pay operating expenses. The ruling is PLR 200901018. The IRS made it public in early January.

Some solar companies have argued that rebates that utilities pay to their customers to encourage them to install solar panels on rooftops and take other actions to reduce demand for electricity from the grid are non-shareholder contributions to capital of the utility customers, at least for customers who file tax returns as corporations. The utilities raise money for the rebates by adding a special charge to utility bills. They usually do so under direction from the state legislature.

An IRS official said the grant ruling should not be read as suggesting commercial customers of utilities can avoid reporting utility rebates as income. He said the agency would have a “very hard time” extending the principles in the grant ruling to cases where an amount is paid by a utility to a customer.

Keith Martin