Septic improvement program grants will be excluded from the gross income of Suffolk County homeowners who received the grants, the Internal Revenue Service announced Friday.
The IRS reversed its 2020 ruling that the grant funds were considered gross income, according to the announcement.
Since the U.S. Department of Agriculture recently decided that the septic improvement program is a benefit to the environment, the IRS determined that the septic improvement grants can be excluded from gross income under a section of the Internal Revenue Code that allows the exclusion for payments made by a state, county or town for the purpose of protecting or restoring the environment.
The USDA announced its decision in the Federal Register on Nov. 16.
“The tax nightmare is over for homeowners who do the right thing by installing nitrogen-reducing [septic] systems to improve water quality,” County Executive Steve Bellone said today.
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 Bellone, noting that 70% of the county is unsewered, pledged to tackle the problem of nitrogen pollution by outdated home septic systems.
“Now that the IRS has agreed that grants should not be double-taxed, many more Suffolk homeowners will take advantage of the county’s award winning Septic Improvement Program.”
IRS reversal will have ‘a huge impact’
The IRS reversal will make “a huge difference” in the program, said Joe Densieski, founder of the Riverhead-based Wastewater Works, a regional distributor of advanced septic systems.
“It’s going to save people a lot of money. Plenty of people — probably 90% are hesitant to have the install done because the grants have been taxable,” Densieski said. “It’s definitely deterred people,” he said, since it sometimes meant several thousand dollars in additional tax liability. “This will have a huge impact,” Densieski said.
According to Sen. Charles Schumer, there were 1,277 installations of innovative/alternative septic systems in Suffolk County as of Nov. 22, with thousands more in the works.
Schumer had written to Secretary of Agriculture Tom Vilsack asking him to review and approve the county’s request for USDA to determine the grants were made for the purpose of protecting or restoring the environment. The county first made the request to USDA in March 2021.
The IRS “made a bad call” when it ruled the grants were included in gross income, Schumer said in a press release last week announcing the USDA determination.
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.
To streamline participation, grants are disbursed directly to installation contractors who pay taxes on the funds as business income. Homeowners participating in the program never receive grant funds.
The Suffolk County Comptroller’s Office issued 1099 tax statements to residents who benefitted from the grants, which caused an uproar. County Comptroller John Kennedy in March 2019 requested an opinion from the IRS, which in January 2020 ruled that the grants would be considered taxable income to the homeowners.
Some participating homeowners saw their income taxes increase by as much as $8,000, while many others chose not to participate in the SIP program due to potential tax liability, Schumer said. Some homeowners were pushed into higher tax brackets, wound up paying taxes on Social Security benefits, or lost senior citizen real property tax exemptions. Others saw their children’s college financial aid reduced or were hit with higher health insurance premiums as a result of the grant boosting their gross income, the senator said.
Taxpayers who have reported grants as gross income on their federal tax returns in prior tax years should file an amended return (Form 1040-X) to decrease their adjusted gross incomes by the amount of the grant previously reported as gross income, the IRS said. The “Explanation of Changes” on Form 1040-X should refer to Announcement 2022-26, the IRS said. Generally the federal tax code requires amended returns to be filed within three years from the filing date of the return being amended. See the IRS website for Form 1040-X FAQs. Download instructions for filing Form 1040-X here.
2022-26
“This decision from the IRS is the correct and just policy, and is a huge victory for Suffolk County taxpayers. Saddling Long Islanders with an unexpected bill come tax season was always unacceptable,” Zeldin said in a press release. The congressman was one of three cosponsors of a bill introduced by Rep. Tom Suozzi in April 2021 to reverse the original IRS ruling, but the bill remained in the House Ways and Means Committee.
Editor’s note: This article has been updated with additional information obtained after it was first published.
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