Proceeds are generally subject to ordinary taxation unless an exception applies. While it seems illogical that TIF grant proceeds would be subject to normal income taxation at the time of receipt, TIF recipients must be aware of this rule and plan their projects so as to qualify for an exception.
Both S corporations and C corporations generally qualify for an exception which allows TIF funds to be received on a tax-free basis. However, the IRS position is that the normal exception for corporations does not apply to partnerships or to limited liability companies that are treated as partnerships for tax purposes. Even for corporations, the funds received normally must become a permanent part of the company's working capital structure, not received as compensation for services rendered, bargained for, result in a benefit commensurate with their value and employed in or contribute to the production of additional income.
A TIF recipient could eliminate the risk of the TIF funds being subject to taxation by developing the project through an S corporation or a C corporation. However, it is often desirable to operate the project through a limited liability company or a partnership entity. In the case of an LLC or partnership, the developer may still be able to receive a TIF grant tax-free by causing the TIF funds to be received by a separate corporate entity. The separate corporate entity could then lend or contribute the TIF funds to the LLC operating entity. While there is some uncertainty surrounding this separate entity structure, the separate entity should have a good argument for tax-free treatment if properly structured.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
