IRS Says Private-Side LSL Replacements Are Not Taxable Income

Last week, the IRS announced that property owners will not incur a federal tax liability when their public water system replaces the private portion of a lead service line — giving needed clarity to the situation as communities across the country prepare to put federal lead service line replacement funding to use.

IRS Bulletin No. 2024-11, dated March 11 but released last week, explained that local water system programs that either fully replace lead service lines, or cover some or all of the cost of replacing the private side of a customer’s lead service line, do “not result in income to the residential property owners under [section] 61 of the Internal Revenue Code.”

“Accordingly,” the IRS statement continued, “water systems and state governments are not required to file information returns or furnish payee statements with respect to the replacement of lead service lines under these programs.”

The announcement came amid rising concerns among water sector stakeholders and elected officials that private lead service line replacements subsidized by utilities could be considered taxable income to the homeowner, increasing their tax liability and requiring the public water systems to issue 1099 forms to these customers. In February Sen. Amy Klobuchar (D-Minn.) wrote to the IRS to ask the agency to resolve the situation “as swiftly as possible.”

“Federal tax policy should make it easier for public water systems and their customers to work together to eliminate lead service lines, not put barriers in the way of cost-effective replacements,” AMWA CEO Tom Dobbins said in a statement following the release of the IRS Bulletin. “AMWA commends the IRS for providing this needed clarity in the tax code, and lawmakers like Sen. Amy Klobuchar who pushed the agency to act. The association looks forward to advancing additional policies like the FLOW Act that will make it even easier for communities to finance the removal of lead service lines.”