Guide to Local Recovery Update: December 1

The Internal Revenue Service has issued new guidance about the taxable status of payments to employers and employees made from the Coronavirus State and Local Fiscal Recovery Funds and the National League of Cities has released a new ARPA-related resource for city leaders.

New guidance on the taxable status of ARPA funding

Just before Thanksgiving, the Internal Revenue Service issued additional guidance about the taxable status of payments to employers and employees made from the Coronavirus State and Local Fiscal Recovery Funds, which was established under the American Rescue Plan Act (ARPA). This guidance determines whether some uses of recovery funds trigger tax consequences, and which payments may or may not be excluded from the recipient’s gross income. Most notably, the guidance includes the following information:

• Payments from the Coronavirus State and Local Fiscal Recovery Funds that are “in the nature of compensation for services” are considered wages and should be included in gross income. They are also subject to standard federal tax withholdings. This includes premium pay, hiring bonuses, cash bonuses, and other such payments.

• Payments from the Coronavirus State and Local Fiscal Recovery for utility costs incurred during COVID-19 are considered qualified disaster relief payments. Therefore, these payments are not considered income and do not require a Form 1099, which is used to report miscellaneous income that is not related to employment. This includes payments from California programs such as the California Arrearage Payment Program and the California Water and Wastewater Arrearage Payment Program.

Cities are encouraged to refer to this fact sheet for additional information or the U.S. Department of the Treasury’s website.

In July 2021, the League of California Cities submitted a comment letter to the Treasury Department regarding the Coronavirus State and Local Fiscal Recovery Funds Interim Final Rule. The letter highlighted nearly 30 areas that need additional flexibility or clarification, including clear direction on how local governments track and report premium pay allocations to non-government employment sectors eligible for premium pay grants, and if employers should withhold federal, state, and local taxes from premium pay.

Cal Cities continues to advocate for additional clarity and flexibility that meets the needs of local governments and improves program outcomes across eligible expense categories. For more information or questions, please contact Legislative Representative Nicolas Romo.

ARPA resources from the National League of Cities

The National League of Cities (NLC) released a new ARPA-related resource for city leaders, the Local Fiscal Recovery Funds Playbook. The playbook centralizes all the information and recommendations that NLC has released on the Coronavirus State and Local Fiscal Recovery Funds grants over the last several months and groups them by the program's eligible expenditure categories. It also organizes the Treasury Department's key guidance resources by format and includes hyperlinks to other resources.

Additionally, NLC is hosting a webinar on Dec. 9 about how cities can bridge the digital divide. Broadband has evolved from a cutting-edge luxury to an essential component of daily life. With more funding and attention dedicated to broadband than ever before, cities have the opportunity to proactively work to bridge the digital divide in their communities. The webinar will focus on NLC’s upcoming Digital Equity Playbook, a comprehensive resource designed to help cities identify and close the digital divide in their communities.

City officials looking for additional information about the American Rescue Plan Act and additional tools for recovery can visit the Cal Cities Guide to Local Recovery webpage.