The good news is that you have received a generous grant from California to replace your old truck with a clean Near-Zero truck. As you celebrate your good fortune, your bookkeeper asks if you have to pay tax on the grant. Talk about a party foul. The question is important but not a reason to spoil the party. In fact, the recent changes in federal tax law are a reason to extend the party.
First to be clear, this is not tax advice. Tax advice needs to come from your tax advisor. This article is to give you something to discuss.
Typically a granting agency will issue a 1099 form for the grant. On the surface, this looks like bad news to have to pay income taxes on a grant. Or is it bad news after all? Income tax on grants prior to 2018 was a very complex topic. However, the new federal tax law has clarified that grants are indeed income and subject to income tax. Simple enough, but that still sounds like bad news. Keep reading because the news gets better.
Another provision of the new federal tax law allows trucks purchased prior to 2023 and used in a trade or business to be expensed 100% of the cost basis in the year the truck is placed in service. Transportation equipment is specifically called out as qualified equipment. Let’s illustrate how this conceptually might look in a tax return. Assume the new Near-Zero truck cost basis is $170,000 and you have a $100,000 Prop 1B grant. The truck cost basis of $170,000 more than offsets the $100,000 grant income, leaving $70,000 of additional tax benefit that further reduces your income tax.
What happens after 2023? Progressively lower write-offs are allowed in the year the truck is placed in service from 2024 until 2027. There is a tremendous tax benefit to securing grants now and deploying new trucks prior to 2024 to take full advantage of the tax benefits under the new tax law.