CRF Payments to ANCs and Their Shareholders Are Not Taxable
On January 21, 2022, the Department of the Treasury held a consultation with Alaska Native Corporations on the federal income tax consequences of Coronavirus Relief Fund (CRF) distributions made to Alaska Native Corporations (ANCs) and to Alaska Native Corporation shareholders. On March 25, 2022, the IRS issued a long-awaited announcement regarding the taxability of CRF funds to both Alaska Native Corporations and their shareholders. The IRS concluded that:
- ANCs do not have to include CRF funds they received from the Treasury and paid out to eligible recipients in their gross income; and
- The COVID-19 assistance payments made by ANCs to eligible shareholders for COVID-19 related expenses and losses are not taxable income for the shareholders.
This is a great result for ANCs and shareholders and will significantly limit the administrative and monetary burden on ANCs and their shareholders. However, the new FAQs do not eliminate the potential tax impact on CRF payments to ANCs, as it appears that ANCs will have to include in their gross income those portions of the CRF payments that they used to reimburse themselves for COVID-19 related expenses.
IRS Issues 14 New FAQs Confirming CRF Payments to Alaska Native Shareholders Are Not Taxable
The IRS guidance is comprised of 14 new FAQs that address various payments that have been made by tribes and ANCs to their members/shareholders. In the new FAQs, the references to tribal members include Alaska Native Corporation shareholders.
FAQ 15 addresses whether ANCs have to include CRF payments in their gross income. IRS states that they do not:
Q15. Are ANCs required to include in their gross income allocations of funds received from the U.S. government to be used to make COVID relief payments for the benefit of ANC shareholders and other eligible recipients? (added March 25, 2022)
A15. No, allocations of funds received by an ANC from the U.S. government to be used for the benefit of the ANC’s shareholders and other eligible recipients are excluded from the ANC’s gross income to the extent that such funds are paid by the ANC in the form of COVID relief payments to or for the benefit of the ANC’s shareholders or other eligible recipients.
FAQs 1 through 13 address specific types of COVID-19 assistance payments made by tribes and ANCs. For each of the payments addressed, the IRS states that the payment is not taxable to the tribal member or shareholder. The tribal/Alaska Native Corporation payments that the IRS specifically confirms are not taxable to the recipient are:
- Payments for reasonable and necessary personal, living, family, or funeral expenses.
- Mortgage assistance payments, regardless of whether they are paid directly to the tribal member/shareholder or to the bank/mortgage holder.
- Utility assistance payments, including electric, internet, and energy assistance payments, regardless of whether they are paid to the tribal member/shareholder or to the utility company.
- Rental assistance payments, regardless of whether they are paid to the tribal member/shareholder or to the landlord.
- Payments for computers or internet access to be used by children going to school.
- Payments for childcare expenses.
- Payments for medical expenses.
- Payments for lost income due to COVID-19, including lost fishing income.
In FAQ 14, the IRS also confirmed that tribes and ANCs do not have to issue 1099s to their tribal members/shareholders for the CRF assistance payments described above because those payments are not includable in the member/shareholder’s gross income.
Finally, the IRS did confirm that grants to small businesses (as opposed to the tribal members/shareholders who own the small businesses) would be taxable to the small business.
The IRS’s New FAQs Only Address CRF Funds Paid Out by ANCs; Funds Retained by ANCs Likely Will Have To Be Included in the Alaska Native Corporation’s Gross Income
The new IRS FAQs state that CRF funds received by ANCs are not included in ANCs’ gross income to the extent that those funds are paid out to eligible recipients. The portion of CRF funds that an Alaska Native Corporation retains would likely constitute taxable income to the business. For example, if an Alaska Native Corporation retained CRF funds to reimburse itself for past COVID-19 payments, the amount so retained is likely taxable income. Alternatively, if an Alaska Native Corporation uses CRF funds to purchase COVID-19 related items or services for its own use, the funds used for that purchase would also likely be taxable to the Alaska Native Corporation. In such instance, the Alaska Native Corporation should also have an eligible deductible expense, leaving a net zero tax impact on the Alaska Native Corporation, although there may be timing issues based on when the expense was incurred.
Accordingly, while the new IRS FAQs provide some guidance as to the treatment of CRF payments made to subrecipients and beneficiaries, the potential tax impact of CRF funds retained by an Alaska Native Corporation should still be considered and analyzed.
This article summarizes aspects of the law and does not constitute legal advice. For legal advice for your situation, you should contact an attorney.
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