Does the American Rescue Plan Act change any pre-existing requirements associated with providing IRS 1099 forms to grantees of funds? (e.g., a municipality that reimburses homeowners and business for the purchase of security cameras)

No, the American Rescue Plan Act (“ARPA”) likely does not change any pre-existing requirements associated with providing IRS 1099 forms to grantees of funds. While some uses of Coronavirus State and Local Fiscal Recovery Funds (SLFRF) may trigger tax consequences for grantees of funds requiring the issuance of a 1099, the use of SLFRF grants for the purchase of security cameras unrelated to the performance of a business service would likely not require a 1099 to be issued.[1]

In general, individuals must include in gross income any payment or accession to wealth from any source unless an exclusion applies. One exclusion is for qualified disaster relief payments under section 139 of the Internal Revenue Code (hereafter “Code”). Under section 139 of the Code, certain payments made by a state or local government to individuals in connection with the COVID-19 pandemic may be qualified disaster relief payments that are excluded from the recipient's gross income.[2]

“A payment by a state or local government generally will be treated as a qualified disaster relief payment under section 139 if the payment is made to or "for the benefit of" an individual to (1) reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster, or (2) promote the general welfare in connection with a qualified disaster.”[3]

“As a federally declared disaster, the COVID-19 pandemic is considered a qualified disaster for purposes of section 139.”[4]

“However, payments are not treated as qualified disaster relief payments if the payments are in the nature of compensation for services performed by the individual. Additionally, payments made to or for the benefit of an individual are not treated as qualified disaster relief payments to the extent the expense of the individual compensated by such payment is otherwise compensated for by insurance or otherwise.”[5]

Under the circumstances, if the individuals and/or businesses contemplated did not perform services but rather installed security equipment which contributed to their general welfare in an effort to mitigate impacts by the pandemic (i.e., increased crime), and these individuals also were not also likely not compensated for by insurance or otherwise, then reimbursements to such individuals and/or businesses would likely not be considered income. Therefore, 1099s would likely not need to be issued. Municipalities should seek the advice of their tax professionals to address the specific facts and circumstances regarding their tax obligations.