Cities across Washington distributed millions of dollars in federal relief funds from the American Rescue Plan Act (ARPA) to businesses, non-profits, and residents. With the new year and tax season upon us, cities may need to send out tax reporting documents to those recipients.

Back in November 2021, the IRS published an FAQ for local governments on the taxability and reporting requirements of payments made from Coronavirus State and Local Fiscal Recovery Funds (CSLFRF) allocated to cities under ARPA. In September of last year, the IRS updated those FAQs with additional information on taxability and reporting requirements in additional scenarios.

One area not covered in the IRS’s FAQs concerns whether cities are required to provide tax forms to businesses or nonprofits who received assistance grants not meant for premium pay or bonuses. While this issue is not directly addressed in the most recent FAQ, back in 2020, the IRS did provide guidance to local governments who used CARES funds to provide business assistance grants. In that guidance the IRS stated:

“The receipt of a government grant by a business generally is not excluded from the business's gross income under the Code and therefore is taxable.”

As CARES funds are like ARPA funds, in that they are meant to address the impacts of the COVID-19 pandemic, it may make sense for a local government to issue 1099s to businesses and nonprofits who received business assistance grants funded by city ARPA funds as those grants would be considered income.

Cities who have provided financial assistance to businesses, nonprofit organizations, or residents using ARPA funds should carefully review the FAQs to determine if they need to provide tax reporting information to those recipients. Recipients covered by the FAQ include:

• Premium pay grants for essential workers.
• Hiring or retention bonuses for essential workers.
• Direct cash assistance to qualifying individuals or families.
• Childcare assistance for qualifying individuals and families.
• Utility assistance for qualifying individuals and families.
• Down payment, closing costs, or PMI assistance for qualifying individuals and families.

We encourage cities to review IRS and Treasury guidance in determining how to issue tax forms.