IRS says Suffolk’s septic grants are taxable income to homeowners

Suffolk homeowners who have received grant funding to install advanced septic systems must pay income taxes on the grant money, according to an IRS ruling issued last month.

The grants are taxable income to homeowners, according to the IRS ruling.

The federal tax agency issued a private letter ruling in response to a March 2019 request by Suffolk County Comptroller John Kennedy. Kennedy made the request after an uproar over his office issuing 1099-G forms to grant recipients.

County Executive Steve Bellone had disputed Kennedy’s position on the taxable nature of the grants, and asked the comptroller to rescind the 1099s. The county’s tax counsel in 2018 issued an opinion letter to the county attorney stating that the county was required to issue 1099s to the installation contractors but not the homeowners.

The comptroller called a press conference yesterday to announce that the IRS had determined he was correct in issuing the 1099s. The grants qualify as gross income to the recipients and must be reported by the county, Kennedy said. The county would face federal penalties if it did not issue the 1099s, according to the comptroller.

The septic improvement program, launched in 2017, provides monetary assistance to homeowners for the installation of advanced septic systems that reduce nitrogen in wastewater before it is discharged to groundwater. The program provides grants of up to $30,000 when combined with additional state grants.

Thus far, the county has executed 369 contracts with homeowners and dispersed 293 grants, according to data provided by the county. The state has executed 530 contracts and dispersed 243 contracts.

Deputy County Executive Peter Scully, who served as DEC regional director for 12 years before leaving that position to assume responsibility for the Bellone’s water quality initiatives, said Bellone is focused on finding a way to protect homeowners from the impact of the IRS private letter ruling. Those fixes may include changes to the program or legislative action, Scully said.

Bellone has already been in discussions with local congressional offices regarding the issue, Scully said.

“The fact that the comptroller is celebrating this as a victory rather than calling on elected officials to work together to find a solution that protects homeowners, is telling,” Scully said.

Kennedy, a former Suffolk County legislator, was the Republican candidate for county executive last year.

Bellone accused Kennedy of choosing to “politicize water quality and decimate a program that has been praised by environmental, labor, and business leaders alike” and said “nevertheless, we are fighting back.” He thanked Sen. Chuck Schumer and Rep. Tom Suozzi for pressing the IRS to reconsider the ruling.

“The IRS got this flat wrong,” Schumer said. “Uncle Sam isn’t losing out on a dime when a Suffolk homeowner participates in this grant program, because the local contractors are already paying the tax—it’s just that simple,” he said, adding “the local program is a win-win for Suffolk homeowners and the environment, which is overrun with nitrogen pollution in our waterways.”

Scully noted that the comptroller spent $30,000 in taxpayers’ money to pay the IRS fee for the private letter ruling.

“It boggles the mind that any elected official would invest taxpayers’ money to convince the IRS to essentially impose a new and second tax on grants that come from tax revenues, but that is what has happened here,” said Scully.

Bellone has made reduction of nitrogen pollution in groundwater and surface water a centerpiece of his administration’s agenda. In 2014, the county released an update to its comprehensive water management plan, which said nitrogen pollution of ground and surface waters is the number one threat to public health and safety in the region. Bellone, noting that 70% of the county is unsewered, pledged to tackle the problem of nitrogen pollution by outdated home septic systems.

Since then, the county has worked to identify and approve advanced septic systems, enacted changes to the sanitary code and wrote a 50-year subwatershed management plan, which is currently under review by the legislature pursuant to the State Environmental Quality Review Act. At the end of the day, more changes to the county sanitary code are coming and they will likely include making advanced septic systems mandatory in new construction or upon system failure. Also under consideration is a requirement for the installation of an advanced system upon transfer of title, but that requirement sparked controversy.

Bellone has stressed the need for making sure there’s a revenue stream in place to help homeowners with the cost, which can run to $20,000.

Scully said participation in the septic improvement program is at an all-time high, despite homeowners being put on notice, after the comptroller contacted the IRS, that the grants could possibly be taxable.

“More than 100 homeowners applied in January alone,” said Scully. “Clearly, people care about clean water.”

“I’ve been accused by some that by doing my job and following federal tax law, this program is being put in jeopardy,” Kennedy said. “To that, I say I was elected to represent the 1.5 million residents of Suffolk County, not a select group which may benefit from this grant,” he said.

“I support efforts to preserve our county’s beautiful environment and our clean water. That does not mean I must stand by and allow the county executive to violate federal law,” Kennedy said.