The Internal Revenue Service (IRS), in partnership with the Treasury Department, recently issued Announcement 2024-10, stating that the replacement of the privately owned portion of lead service lines using public grant dollars “does not result in income to the residential property owners under § 61 of the Internal Revenue Code.”

The announcement goes on to say that the IRS reporting rules do not apply to the cost of replacing lead service lines in such cases, “based on the determination that such replacement does not give rise to gross income to the property owner under § 61.”

Finally, the IRS and Treasury have determined 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 [government-funded projects].” To put a finer point on it, cities that grant funding to residents for replacing their lead pipes will not have to send information reporting forms either.

As AWC wrote last month, below, the ambiguity in the tax code was holding up lead pipe replacement projects and threatened to burden homeowners with thousands of dollars’ worth of tax payments if they participated in government-funded programs to replace lead pipes on their properties. Thanks in large part to the National League of Cities’ advocacy efforts, the IRS’s update to the federal tax code means the threat is no longer real and cities need not be concerned about awarding grants for such projects.

Contact your Congressmember: Support fixing a flaw in lead service line replacement funding

February 2, 2024

The Bipartisan Infrastructure Law (BIL) provides millions of dollars in support for states to conduct lead service line replacement within their infrastructure systems. However, thanks to a federal tax code, unintended consequences may arise if the funding is granted to private property owners.

IRS Code 41 declares that state and federal grants for private properties to replace lead service lines must be reported as taxable income unless the underlying statutes clearly exempt the funds from the tax. In the case of the BIL, the exemption is not included in the statute. As a result, a private property owner who receives grant dollars for lead pipe removal would have to claim the work paid for by the grant as income. This would be true even if the money were used entirely to replace a homeowner’s water connection to the water utility’s system, to prevent contaminated pipes from affecting the drinking water supply.

Homeowners receiving such assistance could end up owing thousands in taxes on the repair work. Their eligibility for other income-restricted federal programs could be impacted. The issue may also cause homeowners to deny access to their property for the utility to make the repair. Furthermore, due to the uncertain tax status of lead pipe replacement projects, states and local governments are holding off on funding these much-needed projects.

While the state of Washington is currently in the lead pipe inventory phase and not yet prepared to award funding for pipe removal projects, if the tax issue is not resolved, our state and cities could also see delays as we begin the effort to replace contaminated service lines.

Stakeholders across the U.S. have been working over the last year to resolve the issue. The office of Senator Amy Klobuchar, from the state of Minnesota, has drafted a letter to IRS Commissioner Danny Werfel, urging the IRS to fix the problem administratively. See a copy of the letter below.

AWC encourages cities to contact your Congressional delegation and to ask them to sign on to the letter. To do so, or for more information, Congressional staff should contact Jack Hostager, in Senator Klobuchar's office, at Jack_Hostager@klobuchar.senate.gov.

The Honorable Danny Werfel
Commissioner
Internal Revenue Service
1111 Constitution Ave, NW
Washington, DC 20224

Dear Commissioner Werfel:

We write to urge the Internal Revenue Service to clarify the tax status of lead pipe replacement grants as soon as possible.

As you know, the Infrastructure Investment and Jobs Act (IIJA) provided long-overdue federal funding to replace dangerous lead water pipes. There are an estimated 9.2 million service lines across the country leaching lead into drinking water, putting the health of children and families at risk. Unfortunately, many state and local governments have been unable to use these critical federal resources to begin replacing lead service lines due to the uncertain tax status of lead pipe replacement projects in our states. The IRS must act expeditiously to remedy this issue.

Through its General Welfare Exclusion, the IRS has a long history of exempting taxpayers from reporting legislatively provided payments that promote public health as taxable income. This policy should apply to property owners receiving funds for lead pipe replacements as well. However, the cost of removing and replacing lead service lines through programs in our states currently must be reported as taxable income. As a result, property owners who have lead pipes replaced through this funding will be taxed for the cost of the replacement work and could in turn owe thousands of dollars in taxes.

We understand the IRS is working on guidance clarifying that lead pipe replacement projects will be considered non-taxable under the General Welfare Exclusion. While we appreciate the IRS’s attention to this issue, it is critical that the agency act as swiftly as possible so state and local governments can begin working with residents to remove dangerous lead service lines from housing units of all types. 

Thank you for your urgent attention to this matter.

Sincerely,

[[Signatures]]