Ruling clarifies tax treatment for lead service line replacement funding

A recent U.S. Internal Revenue Service (IRS) announcement is good news for water systems working to replace lead service lines in their communities.

The IRS and the U.S. Environmental Protection Agency clarified in a Feb. 23 ruling that publicly funded replacement of lead service lines (LSL) on private property does not constitute taxable income and thus does not trigger IRS reporting requirements.

The ruling states that the replacement of LSLs under programs such as those offered through a local water system or funded through the Infrastructure Investment and Jobs Act is not considered income to residential property owners. It also states that water systems and state governments are not required to collect and file related information returns or furnish payee statements. 

“Many water systems and their state and local government partners were struggling to advance LSL replacement projects until the IRS clarified whether property owners would be required to report the cost of private-side LSL replacement as income,” said Adam Carpenter, manager of energy and environmental policy with the American Water Works Association (AWWA).

“Individual water systems, water associations and local government associations have sought this clarification and are relieved that communities are not burdened with the uncertainty and paperwork associated with a potential tax liability, which could have significantly impacted low-income households receiving LSL replacements,” he added.

While the ruling eliminates one hurdle related to LSL replacements, water systems face many other challenges. “These include identifying and inventorying LSLs, securing sufficient work crews to complete the replacements during suitable construction conditions, and of course finding ways to fund the replacements along with their other priorities,” Carpenter said. 

More information about LSL replacement and other lead-related requirements are available on AWWA’s lead resource page and the lead communications page, including the Lead Communications Guide and Toolkit.