IRS says LSL replacements will not need to be reported as taxable income

The Internal Revenue Service (IRS) will issue an official tax guidance update on March 11 that work done by water service providers to replace lead service lines on private property will not need to be reported as taxable income.

The IRS and the U.S. Environmental Protection Agency (EPA) clarified in a Feb. 23 ruling that publicly funded replacement of lead service lines (LSL) on private property does not constitute taxable income and thus does not trigger IRS reporting requirements.

The ruling states that the replacement of LSLs under programs such as those offered through a local water system or funded through the Bipartisan Infrastructure Law are not considered income to residential property owners. It also states that water systems and state governments are not required to collect and file related information returns or furnish payee statements. 

The ruling culminates a year-long campaign by the League of Minnesota Cities, the office of Minnestoa Gov. Tim Walz, the Minnesota Department of Health, and the Minnesota Public Facilities Authority to have the barrier removed to address the significant potential public health issue of private lead service connections.

The work came to a head over the winter 2023-2024 when the municipal leagues from Minnesota and Nebraska teamed up to involve their congressional delegations in pushing the IRS to solve this problem. A letter signed by Republican and Democratic members of both the House and Senate was released under the leadership of the offices of Sen. Amy Klobuchar (D-Minnesota) and Sen. Debra Fischer (R-Nebraska) on Feb. 13, 2024.

The letter requested that the IRS immediately develop a solution that allowed this important and federally required work to move ahead by removing the illogical requirement that the work counted as income, even though the property owner never received any money, and it did not improve the value of the property other than removing a public health threat. The result was the guidance that will be published March 11.

Sources: League of Minnesota Cities, EPA, AWAA

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