IRS releases new FAQs on the taxation of ARPA recovery funds – specifically related to direct cash assistance and payment of premiums.
the State and Local Coronavirus Fiscal Stimulus Fund (SLRFF) is providing a substantial infusion of resources to communities working to reverse the course of the pandemic, deal with its economic fallout, and lay the foundations for a strong and equitable recovery.
The SLFRF provides substantial flexibility for each government to respond to local needs – including support for households and individuals hardest hit by the crisis. More information on the uses of SLFRF can be found in the Provisional final rule.
Certain uses of the SLFRF may have tax consequences. In general, individuals must include in their gross income any payment or acquisition of wealth from any source, unless an exclusion applies.
One exclusion is for qualified disaster relief payments under Section 139 of the Internal Revenue Code. Under Section 139, 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. .
According to the National Association of Counties,
Key highlights of the orientation include:
- Individuals must include bonuses in their gross income as compensation for services. This includes an employee of a state/local government AND a person who received a bonus from a third-party employer who received a subsidy from a state/local government.
- Individuals must include cash bonuses in gross income as compensation for services. This includes a bonus directly from a local government AND a third-party employer.
- Direct cash transfers to households/families (cash used for childcare support, utilities, etc.) DO NOT included in gross income. These payments, made by state/local governments, are intended to pay for family expenses resulting from the COVID-19 pandemic – a qualified disaster.
- If a county provides a direct cash transfer to individuals/families with stimulus funds, a Form 1099 is not required.
- If a utility company uses recovery funds to pay overdue utility balances for individuals, a Form 1099 is not required.