IRS must clear Suffolk septic grants

Here’s a foul-smelling situation: Nitrogen pollution from old cesspools and septic systems is harming Long Island’s waters, contributing to beach closures, fish kills, toxic algae blooms, threats to marshland and drinking water, and disruptions to shellfishing in our backyard. Yet a smart and innovative program to encourage cleaner wastewater treatment systems has been polluted by the federal government, because the Internal Revenue Service has insisted that the grant funding for it counts as taxable income.

This never made much sense for the program Suffolk launched in 2017. The county’s effort was rightly designed to be easy for homeowners, who don’t handle the money directly. Instead, the funds go straight to installation companies. The program drew from a similar and successful effort in Maryland that didn't endure the same taxability problem, Long Island officials have said.

The IRS’s frustrating decision in this case has had a cascade of dismal effects. Close to 900 recipients of grants from Suffolk's program or a similar state one have received IRS 1099s, according to the county, meaning that they had to pay income taxes on that funding. An additional 368 homeowners could receive new 1099s for 2022. Some Suffolk residents suffered ancillary problems from the taxation, such as being bumped up into a higher tax bracket. And many people who might have been interested in this effective and practical way to improve the environment have been unsurprisingly scared off by the threat of the taxman coming.

Resolution is in sight, thanks to the creative advocacy of county officials and Long Island’s congressional delegation, including Senate Majority Leader Chuck Schumer. One section of the tax code says that a payment for selected conservation practices is exempt from federal taxation if it meets certain tests, including the Secretary of Agriculture certifying that the payment was made primarily for particular environmental conservation purposes. Agriculture Secretary Thomas Vilsack has done so, according to a November notice in the Federal Register.

Now the IRS must confirm this finding, making it clear to everyone that the grants will not be considered part of a homeowner’s gross income. And there needs to be guidance for homeowners who already paid the extra tax to recover their money.

Clarity from the IRS can’t come soon enough. It certainly should arrive before 1099 forms go out in the coming weeks for the 2022 round of grant recipients. Suffolk Comptroller John Kennedy, who previously requested federal guidance on whether the grants should count as income, says there has been no change in the IRS position and so grants are “still being treated as per previously issued guidance letter.”

The ball is in the IRS’s court. Suffolk's water quality hangs in the balance.