The Department of Energy, under its Smart Grid Investment Matching Grant Program, provides reimbursement of 20 percent of qualifying smart grid investments.
Qualifying costs include, but are not limited to, certain manufacturing related costs, software that enables computers or other devices to engage in smart grid functions, and metering devices, sensors, and control devices that are capable of engaging in smart grid functions.
Recently, questions have been raised as to whether the DOE grant under this program is subject to federal income tax.
The IRS, in Revenue Procedure 2010-20, concluded that the DOE grant is not subject to federal income tax.
In Rev. Proc. 2010-20, the IRS noted that the DOE grant is considered a contribution to capital that is not subject to tax under section 118 of the Internal Revenue Code. Section 118 of the Internal Revenue Code provides that, in the case of a corporation, gross income does not include a contribution of capital to the corporation.
In particular, the Treasury regulations related to Section 118 highlight that contributions to capital include contributions made by a person other than a shareholder, for example, a governmental body for the purpose of enabling the corporation to expand its operating facility.
The corporation receiving the DOE grant must however reduce the basis of the property to which the DOE grant relates to. For example, if a corporation purchases a smart grid related device for $1,000 and receives a DOE grant under the Smart Grid Investment Matching Grant Program in the amount of $200, the basis of the device shall be reduced by the DOE grant amount.
The resulting basis of $800 is the basis of the property for purposes of depreciation.
Rev. Proc. 2010-20 becomes effective March 10, 2010 and does not apply to non-corporate taxpayers or to DOE grants related to smart grid research, development, and demonstration.
photo: Ian Muttoo