Tax Reform’s Changes to the Treatment of Non-Shareholder Contributions to Capital
The 2017 tax reform act amended Section 118 of the Internal Revenue Code, to dramatically reduce the ability of a corporation to exclude from its gross income grants that the corporation receives from federal, state, or local governments or from civic groups to incentivize corporate investments. Many energy infrastructure projects benefit from exactly these kinds of incentives. Now and in the future, project developers need to be aware of and understand these changes, so that they can work to minimize the adverse consequences of the tax reform act’s amendment.
Before Tax Reform. Before the passage of the tax reform act, Section 118 provided that a corporation’s gross income did not include any contribution to the capital of the corporation. The regulations that accompanied this section explained that this exclusion applied to contributions received from persons other than shareholders (i.e., so-called “non-shareholder contributions to capital”). Thus, for example, if the government or a civic group contributed property to a corporation in order to