The guidance that IRS finally provided (below) is for CERTAIN types of grants... they will look at this as a case by case issue, but unless you are covered here, the starting point is that the additional revnue is just that revenue that will (all other things being equal) increase taxable profit for the year you actually receive the dollars. (Making taking tax losses more difficult and raising any eventual gains)
Run your specifics agains the situations below to see if this MAY be considered a capital contributionm where you can, rather than recognize the income, lower your basis - thereby reising capital gains and making
On November 12, 2010, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) released Revenue Procedure 2010-45 and Revenue Procedure 2010-46, providing guidance to taxpayers regarding the federal income tax treatment of grants made by the United States government.
Section 118(a) of the Internal Revenue Code1 provides that a corporation's gross income does not include certain non-shareholder contributions to the capital of that taxpayer. However, in the case of such a non-shareholder contribution to capital, Section 362(c)(2) requires a basis reduction in the corporation's property. The revenue procedures provide that the IRS will not challenge a corporation's treatment of specific federal grants as a non-shareholder contribution to the capital of the corporation under Section 118(a), provided that the corporation properly reduces the basis of its property under Section 362(c)(2) and the regulations thereunder.
To date, Treasury and the IRS have issued a total of four revenue procedures providing similar "safe harbor" treatment under Section 118(a) for certain federal grants:
- Rev. Proc. 2010-46 (Department of Transportation grants under the High-Speed Intercity Passenger Rail Program and for capital investments in surface transportation infrastructure)
- Rev. Proc. 2010-45 (Department of Energy grants under the Electric Drive Vehicle Battery and Component Manufacturing Initiative)
- Rev. Proc. 2010-34 (broadband grants from the Department of Agriculture and the Department of Commerce)
- Rev. Proc. 2010-20 (DOE Smart Grid Investment Grants).
Treasury and the IRS appear to have adopted the approach of addressing specific federal grant programs on a particularized basis, rather than issuing broad-based guidance. Although the four revenue procedures provide welcome guidance for those taxpayers whose grants are covered by the safe harbor, federal and state governments have provided many grants that are not so covered.