This information is based on the statutes and guidance available as of the date of publication and is subject to change. 

Cash or property contributed to the capital of a corporation is generally not considered taxable income to the corporation. However, as part of the 2017 Tax Cuts and Jobs Act, these rules were amended with the effect of treating certain contributions to capital by governmental or civic entities as taxable to the corporation. 

Old Law

IRC §118 generally provides that a corporation’s gross income does not include any contribution to the capital of the corporation. Prior to the recently enacted tax reform, the definition of “contribution to capital” excluded any contribution in aid of construction (“CIAC”), or any other contribution by a customer or potential customer. Thus, these types of contributions resulted in taxable income to the corporation. However, a contribution of land or other property by a governmental or civic entity to a corporation was treated as a tax-free contribution to capital made by a non-shareholder. 

Tax Reform Changes

Under the new law, after December 22, 2017, non-shareholder governmental and civic entities will no longer be able to make tax-free contributions of land or other property to a corporation. This change will be particularly impactful in the area of state and local development incentives and we expect to see a shift in the way that states and localities structure their development incentive packages to avoid these rules.