As CEO of Otsego Electric Cooperative, one of Tim Johnson’s goals is to make broadband internet service, with all its economic benefits, available to each of his cooperative’s 4,800 accounts. To do so, the co-op took a common path: finding government grants to help offset costs.
Now, because of provisions lurking in the 2017 federal tax reform law, the co-op’s tax-exempt status could be on the line.
“We will probably be forced to make a decision in early 2019 on whether or not to seek full reimbursement” from the state under grants it received for the broadband project, Johnson said.
NRECA’s government relations team, which is working on a legislative remedy, said Otsego’s sudden turmoil is an unintended consequence of language in the new tax law regarding how government grants impact a tax-exempt entity.
To be considered tax exempt, electric co-ops are limited to a 15 percent threshold of non-member income. As written, the 2017 tax law counts money received from any government grant—federal, state or local—as non-member income, where previously, most such grants were considered contributions to capital and not “income.”
Though the IRS has not indicated how or even whether it would enforce this language, it effectively means electric co-ops, particularly small ones, may be vulnerable when it comes to accepting aid long considered vital for operations and community development initiatives. This includes grants from the USDA’s Rural Utilities Service, the Rural Economic Development Loan and Grant (REDLG) program and the Federal Emergency Management Agency for recovery from hurricanes, floods or other disasters.
NRECA is working with Congress, the Internal Revenue Service and the Treasury Department to resolve the issue soon. Lawmakers leading the effort include Sens. Tina Smith, D-Minn., and Rob Portman, R-Ohio, and Rep. Adrian Smith, R-Neb.
“We are working on a legislative fix to be included in an end-of-year tax or funding bill,” said Paul Gutierrez, a senior principal in NRECA’s government relations group.
“We are also requesting the IRS and the Treasury Department to provide guidance so that the new section of the tax law does not have unintended consequences for tax-exempt electric co-ops. Otherwise, the implications are that electric co-ops may not be able to take advantage of the $600 million Congress approved this year for rural broadband through the Rural Utilities Service.”
The New York Broadband Program awarded Hartwick, New York-based Otsego Electric $10 million between 2017 and 2018 to build an 860-mile fiber-optic network. This includes 100 miles of line outside the co-op’s membership territory as a requirement for the grants.
The co-op also won $4 million from the Federal Communications Commission’s Connect America Fund II auction. That money will be awarded over 10 years.
The entire project is forecast to cost about $18 million if it is completed in 2019. Otsego Electric has been reimbursed only $710,000 of the state grant funds and borrowed money to finance the rest of the costs of construction for the first 250 miles of fiber.
The co-op is pondering whether to apply for the balance of the state grant to complete its build at the risk of losing its tax exemption.
“We are hoping changes will be made to the tax code by Congress or in the interpretation of the code by the IRS soon to help us out of this jam,” said Johnson.
Cathy Cash is a staff writer for NRECA.