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IRS Says Smart Grid Grants are Not Taxable Gross Income

An oft-asked question about the Department of Energy’s Smart Grid Investment Grants is whether the IRS will consider them as taxable income to utilities. Having to pay tax on the grants, at a typical corporate income tax rate of 35%, would have a significant negative effect on the business case for smart meter and smart grid projects funded by the grants. Thankfully, the IRS says the grants are not gross income.

The IRS addressed the issue in a private letter ruling made public by the Maine Public Utility Commission in Docket No. 2007-215 Phase II for Central Maine Power. The letter ruling, issued by Paul Handleman, Office of Associate Chief Counsel for Passthroughs and Special Industries, analyzes in detail the applicable tax laws and several tax court rulings relevant to the issue. It found as follows: “(1) The payments from Government to the taxpayer pursuant to the Program for the Plant are a nonshareholder contribution to the capital of Taxpayer under section 118(a) excluded from Taxpayer’s gross income under Section 61; and (2) The basis of the Plant’s capital assets acquired by Taxpayer with the money from the Program that is contributed by Government shall be reduced in accordance with the provisions of section 362(c) and the regulations thereunder.”

In plain English, this means the grants do not increase taxable income, they are “excluded from Taxpayer’s gross income”. Instead, the money provided for smart meter and smart grid equipment and installation is credited directly to the utility’s capital accounts. This means the utility cannot depreciate the assets, which would result in tax savings on plant actually paid for by the government. (Of course this ruling applies only to investor-owned utilities; municipal utilities and cooperatives do not pay income taxes.)

This tax issue illustrates yet again the central role of regulators and policymakers in society realizing the benefits for smart meters and smart grids.

The good news is that the tax issue should not be a problem for utilities receiving smart grid grants.

Disclaimer: this is a great precedent for other smart grid grant recipients. However, because I am not a lawyer, I cannot comment on its legal applicability to other utilities. I also understand that private letter rulings, according to the IRS, technically apply only to the recipient of the ruling. Having said that, there is no reason the logic and analysis above would not apply to other smart grid grant recipients. In acting on this issue, each utility should follow the advice of its own counsel.