After months of uncertainty, the Internal Revenue Service has determined that Suffolk County’s septic improvement grants will, in fact, be considered taxable income.
A push led by County Executive Steve Bellone encouraging homeowners to voluntarily replace old septic systems and cesspools with what are known as Innovative and Alternative On-Site Wastewater Treatment Systems prompted over a thousand homeowners to invest in the costly systems, hoping they would receive rebates in return. Incentivizing the program was initially meant to motivate people to switch over as the county invested in combating nitrogen and bacteria in the county’s waterways. Under Mr. Bellone’s 2014 “Reclaim Our Water” Initiative, nitrogen was declared public water enemy No. 1 and environmental scientists urged that precautions be taken. Last spring, county comptroller John Kennedy requested that the IRS make a ruling on the grants, only to find himself on the receiving end of backlash for issuing 1099 tax forms to both grant recipients who had purchased new systems, and to those who installed them.
In a Jan. 15 ruling, the IRS announced that septic improvement grants would be taxable to the homeowner — something one local civic group described as “a serious setback to the clean water program that Orient residents and others have embraced so actively this winter.”
In an email to its members, the Orient Association broke the news, adding that they will be following changes and developments as they come.
“The Orient Association held a forum on these grants [in the] middle of January,” said Sherry Thomas, an association board member. “85 people showed up and we did another homeowner’s group about 20 days ago and 25 different people showed up to that. So, the interest in Orient has been just outstanding and I don’t think we’ve had a single person who hasn’t been willing to go out and do something about this and then we went and sent the tax advice.”
Ms. Thomas said Southold residents are in a bind, because the town has many cesspools and experiences high water table levels.
“We’ve got this totally motivated community who’s now anxious and concerned,” she said, expressing agreement with U.S. Sen. Chuck Schumer (D–NY), who said the county already taxed Suffolk residents once by adding nitrogen to their water. Now, Mr. Schumer said, many residents feel they are being doubly taxed.
Ms. Thomas said many residents who have installed the new systems are property rich-cash poor, particularly those who own waterfront properties that have been handed down across generations. The upshot of the IRS ruling, she said, is that many Orient homeowners who have been considering participating are now holding off until they have “greater clarity about tax implications.”
In a phone interview Wednesday morning, Southold Supervisor Scott Russell said the town hasn’t seen an abundance of installations, but called the IRS ruling “alarming for several reasons.” Seeing as the federal government issues many direct grants, he argued, the future dependability of such grants –— along with community trust in similar public benefit programs — may be weakened. Many programs that have overwhelming public support, he said, such as affordable housing, farming, deer fencing and solar installation [rebates] tax grants, are now at risk of becoming taxable — or at least, that concern has been brought to the fore.
“Certainly, it’s going to dampen the [success of] alternative treatment systems, but it could also go beyond that,” the supervisor said. “If the IRS determines that a grant is somehow taxable … then they could conceivably start ruling that other grants that are conveyed to people are taxable and that could really have an impact on grants that are used for overwhelming public purposes … [This is] going to make it a lot harder to achieve the very goals they’re chasing.”
Dorothy Minnick of Flanders said last March she expects her tax bill will increase by “many thousands of dollars on top of what I anticipated paying” due to the tax. She received a $10,000 county grant plus a $15,000 Southampton Town rebate, both of which have now been deemed taxable as income.
In a Feb. 12 press release, Mr. Bellone declared that he plans to fight back against both the IRS and Mr. Kennedy, who has been accused of undermining the program and Mr. Bellone’s related legislation. The controversy began in January 2019, when Mr. Kennedy’s office mailed the IRS 1099 forms to grant recipients, who were caught by surprise.
“The decision by County Comptroller John M. Kennedy to issue 1099 tax forms to Suffolk homeowners have cost them thousands of dollars that they otherwise would not have to pay for installing new advanced septic systems to reduce nitrogen pollution and improve our water quality,” Mr. Bellone said in the release. “But then Comptroller Kennedy went even further — he chose to seek an IRS opinion against the advice of the County’s tax counsel as part of his scheme, and the IRS has now decided to go along with this costly plan.”
Ultimately, Mr. Bellone argued that the comptroller’s actions and the IRS decision directly contradict the goals of the Suffolk County Drinking Water Protection Program, the legal opinion of the county’s tax counsel and similar established practices in other areas, such as the state of Maryland.
According to the press release, 111 county homeowners enrolled in the program last month, bringing the total number of participants to more than 1,300.
Robert Dunn of Peconic, 73, installed his alternative septic system in September, primarily for his children. His old system was working fine, but was noticeably aging and undersized. Mr. Dunn lives about 45 feet from the water at Goldsmith’s Inlet, he said, adding that there is grave concern about what goes into the ground there. He was raising his home post-Hurricane Sandy and decided to remove a shed on his property to make room for an upgraded system.
“I applied for a county grant,” he said. “They were extremely helpful at the county level in terms of the Board of Health and just getting it done and, of course, I was a little taken aback by finding that I was getting a 1099 for it.”
Mr. Dunn’s system cost $33,000 to install, which was paid through the county. He said he had been a big fan of the program, recommending it to people, but that now, he has reservations about its rollout and execution.
“I do think it’s a great program, but not the way it’s structured like this … I never got any money. Nobody ever wrote a check to Robert Dunn, so I don’t even know why I get a 1099. They pay the installer directly, he gets the 1099, that was his work and he pays tax on it. That, to me, is fair … for the county to give me a grant and then have me pay taxes on it? It’s just asinine.”
He conceded that the taxes he’s now expected to pay won’t destroy him, but said there are many other grant recipients living on Social Security benefits who will now have to pay taxes on those benefits as well, which may put them in financial distress.
“Imposing a new tax on those who choose to do the right thing is just plain wrong, and we will work to find a solution to undo the damage the comptroller has done,” Mr. Bellone said in the press release.