Tax on government grants spells trouble for electric co-ops

'This issue cuts right at the heart of who we are as not-for-profit, consumer-owned, community-focused co-operatives'

Electric co-ops in the US are counting the cost of a 2017 amendment to the federal tax code, which makes them liable for tax if they accept large government grants.

If these grants – which include aid packages to help them rebuild after natural disasters – amount to more than 15% of their annual revenue, the electric co-op receiving them could lose its tax-exempt status.

Industry observers warn the move could spell higher electricity costs and a slowdown in service improvements in rural areas, including the expansion of broadband and the switch to renewables.

The trade body for the sector, the National Rural Electric Cooperative Association (NRECA), is now leading a campaign to get Congress to pass the bipartisan RURAL Act by the end of the year.

This will remove the risk to co-ops’ tax-exempt status if they take government grants to restore power after a natural disaster, bring broadband service to rural residents, boost economic development in local communities or create energy efficiency programmes.

At a regional meeting in Buffalo, NY, on 5 September, NRECA chief executive Jim Matheson called on member co-ops to back the campaign for the bill.

“This issue cuts right at the heart of who we are as not-for-profit, consumer-owned, community-focused co-operatives, and this is the time for us to act,” he said. “I’m asking you to do this for your co-op and for your community.”

“Every co-op is one event away from suffering significant damage to its poles and wires, by any hurricane, ice storm, tornado, wildfire or flood. In the next 18 months, it might happen to you. It will definitely happen to at least one co-op in this room.”

The problem is an unexpected result of the Tax Cuts and Jobs Act of 2017, which contains a provision that counts federal, state and local grants to co-ops as non-member income. Before that, grants had been defined as capital.

Co-ops must receive at least 85% of their income from members to remain tax-exempt under federal law. If grants are counted as income, some co-ops could have difficulty maintaining their non-profit status.

A bipartisan group of lawmakers from rural areas introduced the RURAL Act in April to allow co-ops to take grants without risking their tax status, but this has not yet been scheduled for a vote in the House or Senate.

Mr Matheson warned that co-ops which have already taken grants to bring broadband to their consumer-members could be forced to pay taxes next year.

“There’s a reason the for-profit companies haven’t built broadband in rural areas – the economics don’t work,” he said. “Many co-ops want to provide broadband to their members, and government grants are important to their efforts. But look at the choice a co-op now faces a choice of do it and face higher costs by paying taxes, or don’t do it and leave our consumers without broadband.

“This is wrong. We have to change it.”

Among the co-ops affected is Washington Island Electric Co-op, in Wisconsin. The co-op, which serves the small a small community on a Lake Michigan island, accepted funds last year to repair a severed underwater power line. State funds to help with the US$4m repair bill totalled $600,000 – double the 15% threshold.

“When we lose nonprofit status, we’re going to be paying tax on the money we receive from the state,” general manager Robert Cornell told the press. “The state government gives and the federal government takes away.”

Another co-op to be hit by the change is Otsego Electric Cooperative, in Hartwick, NY, which won nearly $4.3m in federal funds over the next decade to extend broadband to over a thousand rural homes and businesses.

It has had to slow down broadband construction but only to a point which keeps it within its contractual obligation. The co-op did not even know of the tax problem until February last year.

“We’re well aware that we’re going to exceed our threshold for this year,” chief executive Tim Johnson told Bloomberg. “The train had already left the station when the tax bill arrived.”

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