Taxability of Coronavirus State and Local Fiscal Recovery Funds

Taxability and Reporting of Payments from Coronavirus State and Local Fiscal Recovery Funds

The Internal Revenue Service provided answers regarding Coronavirus State and Local Fiscal Recovery Funds (SLFR Funds). These funds give eligible state and local governments a substantial infusion of resources to meet pandemic response needs.

The answers are in FAQs (FS-2021-16) and detail the tax consequences for individual recipients and the reporting requirements for the states and local governments and employers, as applicable.

Some SLFR Fund recipients may have to report certain payments as income and may owe tax depending on the purpose of the payment. Today’s FAQs also provide answers regarding payments used to assist with childcare or other basic needs.

States and local government administrators will find answers regarding their filing requirements, including when Forms 1099 need to be filed.

These FAQs are being issued to provide general information to taxpayers and tax professionals as expeditiously as possible.

Some uses of SLFR Funds may trigger tax consequences. In general, individuals must include in gross income any payment or accession to wealth from any source unless an exclusion applies. One exclusion is for qualified disaster relief payments under section 139 of the Internal Revenue Code (Code).

Under section 139 of the Code, certain payments made by a state or local government to individuals in connection with the COVID-19 pandemic may be qualified disaster relief payments that are excluded from the recipient’s gross income. A payment by a state or local government generally will be treated as a qualified disaster relief payment under section 139 if the payment is made to or “for the benefit of” an individual to (1) reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster, or (2) promote the general welfare in connection with a qualified disaster. See section 139(b)(1) and (4). As a federally declared disaster, the COVID-19 pandemic is considered a qualified disaster for purposes of section 139. See section 139(c). However, payments are not treated as qualified disaster relief payments if the payments are in the nature of compensation for services performed by the individual. Additionally, payments made to or for the benefit of an individual are not treated as qualified disaster relief payments to the extent the expense of the individual compensated by such payment is otherwise compensated for by insurance or otherwise. Read more

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