Tax Cuts and Jobs Act Taxes Some Incentives

ACREL News & Notes

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Section 1181 provides “[i]n the case of a corporation, gross income does not include any contribution to the capital of the taxpayer.”2 The regulations promulgated under Section 118 under prior law provide, with respect to non-shareholder contributions to capital of corporations3 as follows:

Section 118 also applies to contributions to capital made by persons other than shareholders. For example, the exclusion applies to the value of land or other property contributed to a corporation by a governmental unit or by a civic group for the purpose of inducing the corporation to locate its business in a particular community, or for the purpose of enabling the corporation to expand its operating facilities.4

Under Section 118 prior to the Tax Cuts and Jobs Act (the “Act”)5, contributions to a corporation by nonshareholders, including governmental entities, civic groups and utilities, were not included in the corporation’s income. The Internal Revenue Service had issued guidance that a variety of governmental grants were excluded from income by the corporate recipient of the grants. 6

The Act amended Section 118(b) to provide that “contribution to capital of the taxpayer” does not include “any contribution by any governmental entity or civic group (other than a contribution made by a shareholder as such)”7 Section 118, as amended, applies to contributions made after December 22, 2017.8

The Conference Report states:

The provision provides that a contribution to capital, other than a contribution of money or property made in exchange for stock of a corporation or any interest in an entity, is included in gross income of the corporation. For example, a contribution of municipal land by a municipality that is not in exchange for stock (or for a partnership interest or other interest) of equivalent value is considered a contribution to capital that is includable in gross income. By contrast, a municipal tax abatement for locating a business in a particular municipality is not considered a contribution to capital.9

States, communities and utilities can continue to contribute undeveloped land, improved land, site improvements and cash to businesses, but the value of such incentives to entice corporate business to locate in a community has been diminished by the cost of including the contribution in taxable income. In a Tax Increment Financing (“TIF”), if the authority borrows against the future tax increment and grants the proceeds to a business receiving the incentive, the grant will be included in the business’ income, and the property tax is deductible when paid. If the TIF is a “pay as you go” TIF, where the business pays its property tax and receives a rebate of the increment to reimburse it for qualifying expenditures, the property tax deduction and the income from the receipt of the increment should offset. Note that as the Conference Report makes clear, an abatement of property tax is not a contribution to capital and does not result in income to the business whose tax is abated.

1 All Section references are to the Internal Revenue Code of 1986, as amended, unless otherwise indicated.

2 Section 118(a)  

3 Section 118 only applied to contributions to the capital of a corporation and not contributions to partnerships or limited liability companies taxed as partnerships.

4 Treas. Reg. § 1.118-1 (emphasis added)

5 PL 115-97, (12/22/2017)

6 See, e.g., Rev. Rul. 93-16, 1993 C.B. 26 (FAA grants to corporate owners of public-use airports are nonshareholder contributions to capital excludable under Section 118.

7 Section 118(b)

8 The amended Section 118 does not apply to a contribution to capital made after December 22, 2017 by a governmental entity pursuant to a master development plan that had been approved prior to such date by a governmental entity.

9 H.R. Rep. No. 115-466 at 397 (2017) ( Conf. Rep.), Committee Reports (Code Arranged – USTR) RIA 

Republished with permission. This article first appeared in ACREL News & Notes on May 8, 2018.