Does Treasury Guidance indicate whether municipalities must provide tax documentation to ARP CSLFRF subrecipients (such as persons or businesses receiving rental assistance)?

At the time of this writing, the U.S. Department of the Treasury (“Treasury”) has not issued any guidance mandating local governments to provide tax documentation to subrecipients of funding from the American Rescue Plan Act of 2021 (“ARP”). The United States Internal Revenue Service’s (“IRS”) guidance published on November 17, 2021, address many issues relating to taxes.  However, municipalities should discuss their specific facts and circumstances with tax and financial professionals prior to reaching any final conclusions.

According to IRS Frequently Asked Questions (“FAQs”), some uses of Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) may trigger tax consequences. If feasible, the state or local government providing funding should consider expressly informing subrecipients whether they should include CSLFRF funding as gross taxable income. As noted above, there is currently no express requirement to provide subrecipients with this information or tax documentation.

Generally, individuals must include any payment or accession to wealth from any source as gross income, unless an exclusion applies.[1] However, subrecipients may avail themselves of at least one possible exclusion to this rule. Under Section 139 of the Internal Revenue Code (the “Code”), certain payments made by a state or local government to individuals in connection with the COVID-19 pandemic may qualify as disaster relief payments, which are excluded from the subrecipient’s gross income. 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:

• Reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as the result of a qualified disaster, or
• Promote the general welfare in connection with a qualified disaster.[2]
• Because the COVID-19 pandemic was federally declared a disaster, ARP CSLFRF payments to sub recipients could potentially qualify as disaster relief payments for the purposes of Section 139 of the Code. Qualified disaster relief payments generally do not require additional documentation such as a 1099-MISC, as these payments are not income. 

Municipalities should note that payments are not treated as qualified disaster relief payments if the payments constitute compensation for services performed by an individual. Additionally, payments made to or for the benefit of an individual are not treated as qualified disaster relief payments to the extent that the expense of the individual compensated by such payment is otherwise compensated by insurance or otherwise.[3]

The FAQ further elaborates on specific instances where payments to recipients may be included as taxable income. For example, subrecipients receiving premium pay or bonuses from CSLFRF are required to report those funds as gross income.[4] In contrast, rental payments or utility assistance could in some cases be excluded from gross income because these payments are made by a state or local government to individuals and are intended to pay for personal expenses incurred during the COVID-19 pandemic. As a result, such rental and utility assistance payments are generally classified as qualified disaster relief payments under Section 139 of the Code.[5] However, as noted above, municipalities should consult an appropriate tax professional to address their own specific circumstances. For example, the manner in which rental assistance payments are made could affect whether the payments qualify as gross income (and thus, whether a 1099 or similar documentation is required).[6]

For more information, municipalities may refer to the IRS FAQ and continue to monitor Treasury’s website on CSLFRF for forthcoming information and guidance.