Story Updated: April 16, 2019
Congress has taken the first step to protect electric cooperatives from losing their tax-exempt status when they receive government grants to help restore power after a storm or bring broadband service to rural communities.
Reps. Terri Sewell, D-Ala., and Adrian Smith, R-Neb., introduced legislation April 16 to correct an unintended consequence of the sweeping Tax Cuts and Jobs Act that Congress passed in 2017. It’s a companion bill to the one introduced in the Senate on April 4 by Sens. Rob Portman, R-Ohio, and Tina Smith, D-Minn.
The 2017 tax law inadvertently put nonprofit co-ops in the position of having to decide whether to risk their tax-exempt status to accept grants, including those from the Federal Emergency Management Agency to restore power after storms, floods, fires, earthquakes or other disasters, said Paul Gutierrez, an NRECA lobbyist who has been working with lawmakers to fix the problem.
Co-ops also would have to think twice before taking grants that help provide broadband service or fund economic development, energy efficiency and renewable energy programs.
“Our rural communities depend on reliable infrastructure, access to broadband and secure energy sources for their local economies to thrive,” Sewell said. “We must do more to provide high-speed internet—and the opportunities and resources that it brings—to the 22.4 million Americans living in rural parts of our country without quality internet access.”
The 2017 law contains a provision that counts federal, state and local grants to co-ops as non-member income rather than capital, which is how grants had previously been defined, Gutierrez said.
The statute threatens the nonprofit business model of co-ops, which must receive at least 85 percent of all income from consumer-members to keep their tax-exempt status under federal law. Defining grants as non-member income makes it more difficult for co-ops to meet that requirement.
Tim Johnson, CEO of Otsego Electric Cooperative, said the Hartwick, New York, co-op is choosing to use state broadband grants but is risking its tax-exempt status in the process. The co-op is applying for grant reimbursements from the state that will put Otsego well over the 15 percent limit for non-member income in 2019. It will lose its tax-exempt status if the tax bill fix is not passed by the end of this year, Johnson said. What’s more, 21 percent of the grant money will have to be used to pay taxes on the grants, he said.
“The combined penalties of paying income tax on grant funds and the loss of tax-exempt status will significantly reduce our ability to build as many locations as we originally projected, depriving many households of the intended and direct benefits of public grant funding for the broadband project,” he said. “This is clearly not good public policy and the inadvertent mistake that has caused this situation must be fixed.”
The new bipartisan legislation—the Revitalizing Underdeveloped Rural Areas and Lands (RURAL) Act—would solve the problem by changing the tax code to exempt federal, state and local grants from being defined as income for electric co-ops.
“While continuing to ensure rural electric co-ops are largely funded by their membership as a condition of their tax-exempt status, we should also ensure funds received from grants or for pole usage do not affect their tax status,” Adrian Smith said.
Without the legislation, Portman said, “many co-ops may miss out on grant income or disaster assistance, hurting our efforts to promote economic development and job creation in these rural areas.”
Tina Smith said Congress “should take any action we can to help us get more Minnesotans and Americans in rural areas connected.”
“So when I heard from several Minnesota cooperatives at risk of losing their tax-exempt status, I wanted to reverse that,” she said.
NRECA hopes that Congress will act on the legislation “in the very near future,” Gutierrez said.
“This is an urgent issue for a number of members that will lose their tax-exempt status this year if Congress doesn’t act on this unintended consequence,” he said.
Erin Kelly is a staff writer at NRECA.