The new funding sources made available to Tribal governments and their businesses during the COVID-19 pandemic created important tax considerations for Tribes.
These considerations may include that Tribes may be eligible to receive reimbursement of certain payroll taxes already paid. There are also important deliberations addressing how Tribal members might be taxed as a result of various programs provided during the pandemic.
These considerations, plus other matters that should be addressed before year-end, are discussed below.
Tax Credits Available to Tribal Governments and Their Businesses
Our article published earlier this year, New COVID-19 Relief Provides Aid to Tribes and Tribal Businesses, discusses the requirements and qualifications of available tax credits and how to seek reimbursement.
Unfortunately, many Tribal governments that may have paid qualifying wages haven’t yet claimed these tax credits. This may be because the IRS was late informing Tribal governments about their eligibility for these credits or because these qualifying wages were paid from the Coronavirus Relief Funds (CRF) made available to Tribes as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
If that’s the case for your Tribe, there are still options for claiming these tax credits:
- You can file Form 941-X within three years from the date a Form 941 was originally filed or two years from the date the tax reported on Form 941 was paid, whichever is later.
- If your Tribe paid the qualifying wages with CRF, you can still claim the tax credits but must redeploy the CRF to other allowable costs before the CRF spending deadline on December 31, 2021.
IRS Tax Updates Impacting Tribes
In summer 2021, the IRS published draft FAQs to address the following topics related to COVID-19 tax relief for Tribes and Tribal entities.
Tribal Member Emergency Relief Payments
The FAQ addresses the federal income tax impacts of payments made by Tribal governments to Tribal members eligible under the following legislation:
- CARES Act
- Consolidated Appropriates Act of 2021 (CAA)
- American Rescue Plan Act (ARPA)
These pieces of legislation contain funds that have allowed Tribes to provide emergency relief payments to Tribal members and their families for reasonable and necessary expenses resulting from the COVID-19 pandemic.
The FAQ clarifies that these emergency relief payments aren’t considered taxable to Tribal members, including assistance received through the following funds:
- Emergency Rental Assistance Program
- Homeowners Assistance Fund
The following items and services provided to Tribal members have been deemed nontaxable as well:
- Computers and related equipment
- Internet access services
- Certain supplies for children to attend classes remotely
- Childcare expenses during the pandemic
- Water and wastewater expenses
- Potable drinking water
As a result, Tribes aren’t required to make updates to their general welfare programs or policies to include such programs to make nontaxable status.
Businesses that Received Tribal Grants
The US Department of Treasury guidance for CRF allows Tribes to establish grant and loan programs to support businesses. The FAQ clarifies that if the business receiving a grant or loan is subject to federal income taxes, the receipt of a government grant is taxable.
If a loan is provided and subsequently forgiven, the loan proceeds are still generally taxable. However, if the grant is made to a Tribal member-owned business, it isn’t taxable to that member.
General Welfare Updates
This summer, the Tribal Taxation Advisory Committee drafted a report to be provided to the US Department of Treasury that focused on the core General Welfare Exclusion (GWE) principles. Many items were addressed in this report, but the key principles included the following:
- Allow flexibility to administer a GWE program based on each Tribe’s unique circumstances
- Continue to allow ambiguities to be resolved in favor of the Tribe
- Allow lavish and extravagant to be defined at each Tribe’s individual discretion
- Perform enforcement or IRS audits of GWE programs on a prospective basis
The report also emphasized the importance of safe harbor provisions in applying the GWE. It stated that these provisions should be optional for Tribes, so as not to limit the rights of each Tribe under the regulations.
The report proposed clarifying important matters, such as:
- Removing the presumption that equal payments from a GWE program are, in essence, per capita payments
- Allowing Tribes to set aside assets in a minor’s trust for GWE purposes
- Recommending flexibility in what documentation may need to be obtained to substantiate how GWE payments were spent by Tribal members
Social Security Payments for Tribal Members
In August 2021, the Social Security Administration (SSA) announced changes to their rules about what types of financial assistance can affect a Tribal member’s eligibility for social security income (SSI) or their monthly SSI payment amount.
As part of this effort, the SSA clarified that financial assistance provided from Tribal governments to assist Tribal members due to COVID-19—funded through CRF or ARPA’s Coronavirus State and Local Fiscal Recovery Funds—wouldn’t count against SSI eligibility and payment amounts.
The SSA has indicated they’re reviewing claims going back to the beginning of the COVID-19 pandemic to update their records and will directly contact impacted Tribal members to restore payments or take a claim.
Tribal officials must deal with the IRS more frequently—especially regarding matters relating to payroll taxes and credits as well as Tribal member tax matters.
It’s important to keep up to date with these deliberations in case your Tribe undergoes an IRS audit because IRS agents might not be familiar with some of the exceptions provided to Tribes. Having this information readily available may help your Tribe answer questions and potentially reduce the scope of the audit.
We’re Here to Help
For more information about these tax matters and how they may affect your Tribe, contact your Moss Adams professional.