Smart grid grants do not have to be reported as income if received by a corporation, the IRS said in March.

The grants are matching grants paid by the US Department of Energy to utilities to cover 20% to 50% of the cost of meters, computer software, sensors and control devices that help manage the electricity grid.

The IRS said that it views the grants as a capital contribution by someone who is not a shareholder when the recipient is a corporation. Capital contributions do not have to be reported as income.

The agency made the announcement in early March in Revenue Procedure 2010-20.

Power companies may have been hoping for another theory for not taxing the grants; the theory the IRS used suggests the grants may have to be reported as income if received by a partnership.
Meanwhile, the Maryland attorney general said shortly before the IRS announcement in an opinion in late February that the grants are income to utilities in Maryland. Maryland starts with a federal definition of taxable income and makes adjustments. He reasoned that since the grants are taxable at the federal level, they must also be taxable in Maryland. The opinion was rendered moot by the IRS decision two weeks later.

Keith Martin