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Tax update: Many economic development grants are now taxable income

February 22, 2018

The tax law signed at the end of last year introduced a provision that will significantly affect many economic development offices and related nonprofits across the country: “contributions to capital” will now typically be included in a corporate taxpayer’s gross income. Previously, grants, free land and certain types of tax credits from governmental units or civic groups to support capital expenses were tax-free awards for the beneficiary. Since the signing of the bill, many of these awards are now taxable. The exact circumstances under which previous awards were exempt and new awards are not are complicated: Bloomberg provides a detailed analysis of the law and its implications, pending further guidance from the IRS.

 Another nation-wide change to economic development incentive practices was implemented by the Governmental Accounting Standard Board’s statement 77 requiring tax abatement disclosures by governments. The statement has since been updated by a new implementation guide for fiscal years beginning July 1, 2017 or later. States and municipalities have long received criticism for their incentive practices, but required disclosures and restructured tax treatment may be helping to drive change. Recent work by Pew suggests that more states are evaluating their programs more closely than in the past.