On February 23, 2024, the Internal Revenue Service (IRS) announced that federal funds received by residential homeowners for the purpose of replacing lead service lines (LSLs) are not taxable.
The determination is significant in light of the U.S. Environmental Protection Agency’s (EPA) December 6, 2023, draft rule requiring water systems to replace LSLs within 10 years. LSL replacement costs were specifically mentioned as a cause of concern with the proposal during an Office of Advocacy (Advocacy) roundtable held on January 9, 2024. Advocacy also discussed these costs in the February 5, 2024 comments submitted to EPA.
Typically, LSLs are jointly owned by the public and a private property owner. In addition, the replacements require both the public and private portions to be addressed simultaneously. In some cases, to replace the private portion of LSLs, a water system will either reimburse property owners for the cost of the expense or directly pay contractors on the property owner’s behalf.
The IRS determined that any funds received by private homeowners to replace LSLs “do not result in income to the residential property owners” because “the public water system controls all or virtually all aspects of the replacement work.” Thus, the funds are not taxable. Additionally, the IRS stated that “water systems and state governments are not required to file information returns or furnish payee statements with respect to the replacement of lead service lines under these programs.”
Small entities are encouraged to read the entire IRS determination and consult with a tax professional for further information.
- Read the IRS determination.
- Read the Office of Advocacy’s Comments on EPA’s proposed Lead and Copper Rule Improvements.
- Advocacy contact: Send an email to Nick Goldstein at nick.goldstein@sba.gov.