On March 10, 2010, the IRS issued Revenue Procedure 2010-20, which provides that Smart Grid Investment Grants (SGIGs) made by the Department of Energy to a corporation will not be taxable income to the corporation.
Under Section 118(a) of the Internal Revenue Code, a corporation can exclude from income certain non-shareholder contributions to capital. To qualify for the exclusion a corporation must reduce its basis in any asset purchased with the contribution. While the corporation doesn't have immediate income, it also is not able to depreciate the property purchased because of this reduction. Of course, this is generally a good result for the corporation.
SGIGs will be subject to these rules. Therefore corporations receiving a grant will be able to exclude it from income as long as the basis of any asset purchased with the grant is reduced.
Importantly taxpayers receiving SGIGs that are partnerships or LLCs may not be able to take advantage of this exclusion. The IRS, in a Coordinated Issue Paper, has concluded that neither Section 118 nor the cases preceding its enactment can be applied to partnerships and LLCs. Under the IRS theory, SGIGs made to partnerships or LLCs would be considered taxable income to the recipient. Practitioners have been critical of the IRS's position. Recipients of SGIGs that are partnerships or LLCs should consult with a tax adviser regarding possible alternatives.