Federal Taxes On Septic Improvement Grants May Be Reversed Under Bipartisan Legislation

Homeowners in Suffolk County who received septic improvement grants have had to pay thousands of dollars in taxes on the grant proceeds, but that could be reversed under bipartisan federal legislation introduced last week.

Suffolk County and Southampton and East Hampton towns each have grant programs that aim to improve water quality in local rivers, ponds and bays by subsidizing the cost of replacing cesspools and conventional septic systems with innovative/alternative septic systems that use the latest nitrogen-reduction technology. The grants were intended to be tax-free, but the IRS said otherwise.

U.S. Senator Kirsten Gillibrand and U.S. Representative Tom Suozzi have put forth legislation to overturn an IRS ruling that the grant money must be treated as income by both the homeowner and the installer. Under the bill, as long as the waste management measures were installed at a taxpayer’s principal residence, any state and local subsidies can be excluded from the taxpayer’s gross income. The bill — which was originally floated in 2020 but did not get far then — is retroactive, allowing subsidy recipients to amend their tax returns for 2019 and 2020.

“Requiring homeowners to pay income taxes on grant funding that is being disbursed directly to contractors who are already declaring the grant funding as income and paying those taxes is double taxation, and is just wrong,” Suffolk County Executive Bellone said in a statement. “The people of Suffolk County voted to invest their hard-earned tax dollars to improve water quality, only to have the IRS decide to tax program funds intended to protect the environment.”

In Flanders, homeowners Stephanie and Kyle Miller were left with an unexpected $6,000 tab for the innovative/alternative septic system installed on their property in May 2020.

“We were completely blindsided and unprepared for the tax,” Ms. Miller said Tuesday.

She explained that their cesspool started to cave in, and the Suffolk County Department of Health Services inspected it and deemed it a “catastrophic failure.” The Millers were informed that, due to their proximity to Reeves Bay and Flanders being a high-priority area, they were only allowed to install an innovative/alternative system in place of the cesspool.

Ms. Miller filed an application on the county’s grant program website, reclaimourwater.info, and they were awarded $26,000, paid directly to the installer, South Fork Septic. They also paid $4,000 out of pocket for engineering work and electrical upgrades to accommodate the new system and were later reimbursed by Southampton Town. They were not reimbursed for topsoil and seed to repair their lawn after excavation work, she added.

Then, this year, the Millers received 1099 tax forms from both Suffolk County and Southampton Town for the grant proceeds, totaling $30,000, resulting in them owing $6,000 in income tax. Ms. Miller said she reached out to Suffolk County Comptroller John Kennedy’s office and never received a reply. The County Department of Health Services wrote her back, informing her that the comptroller had directed his staff to issue the 1099s and that the comptroller had requested a private letter ruling from the IRS, which ruled that the grants must be treated as income. Southampton Town Supervisor Jay Schneiderman’s office informed her that there was nothing the town could do.

Ms. Miller said it is extremely important that the law be revised not just for past applicants like themselves, but for future applicants. “We need basically every homeowner along the bay to do this, and no one is going to do it if they can’t afford it,” she said. “From an environmental standpoint, it’s crucial for the success of the program.”

All four members of Long Island’s congressional delegation have signed on to the bill. In addition to the original sponsor, Mr. Suozzi, a Glen Cove Democrat, the co-sponsors are Democrat Kathleen Rice of Garden City and Republicans Lee Zeldin of Shirley and Andrew Garbarino of Bayport.

“Saddling Long Islanders with an unexpected bill come tax season is unacceptable, and we must stop shooting from the hip when it comes to their hard-earned tax dollars,” Mr. Zeldin said in a press release calling for the legislation’s passage.

Suffolk County Legislator Bridget Fleming of Noyac, who represents the South Fork, said the legislation is welcome support for the county’s efforts to address a crisis in water quality that affects the economy, public health and quality of life.

Ms. Gillibrand and Mr. Suozzi plan to tack the bill onto a larger infrastructure package.