Taxability of Grant Funding

Congress will be considering a bill in a lame duck session after the election to make grant revenues non-taxable. This is a big deal because making grants taxable was another huge hurdle for smaller ISPs to accept large amounts of grant funding. The new legislation is co-sponsored by Senators Mark Warner (D-Va.) and Jerry Moran (R-Kan.). They are hoping the bill will be considered as part of a larger tax bill that will consider other issues like keeping the government open past December, extending the President’s enhanced child-care credit, and other tax and financial issues.

Grant funding is normally taxable. The majority of federal grants go to state and local government agencies, which by definition don’t pay income taxes. But folks like businesses and scientists that accept grant funding have always had to declare the grant funding as income. That makes a lot of sense for a grant that is largely used to pay salaries – the grant is income while the salaries are deductions, and there would typically be little tax liability for most grant recipients.

But that’s not true for grants used to build infrastructure. Consider a $20 million grant to build fiber. If grant income is taxable, a grant recipient accepting the grant in one year will incur roughly a $4.2 million federal tax liability for the year. Over the next 20-30 years, the grant recipient will see taxable income reduced by the original $20 million as the grant recipient writes off the asset through depreciation expense. Theoretically, a $20 million grant recipient has no overall tax liability over the life of the grant assets. But a grant recipient must write a big check to the IRS now and wait for decades to slowly get the money back.

No ISPs like the idea of a huge upfront tax bill as the cost of taking a grant. The largest ISPs can handle this since their corporations have a lot of cash. This is not true for smaller ISPs. I know very few small ISPs who sit with million of cash in the bank that could be used to cover the instant tax liability. Having to pay this tax is a major disincentive to taking grants – and could be a disaster for an ISP not ready to make the big tax payment.

The IRS used to have the authority to make this kind of change, but that ability was rescinded in the big tax bill that passed in 2017. The IRS waived the taxability of grants in 2009 for broadband infrastructure grants that were awarded under the BIP and BTOP programs. But with the IRS out of the picture, it now requires a specific Act of Congress to excuse the taxability for broadband grants.

This taxability issue doesn’t only apply to the big upcoming $42.5 billion in BEAD grants but to all other broadband grants. The billions in grants being awarded by the NTIA, the USDA ReConnect program, and the many state broadband grants are also taxable. Even should Congress pass this law, it’s unlikely that it will reach back to past years to excuse grants taken recently.

ISPs in most states must also contend with the state income taxes that would follow the grants. Most states automatically adopt changes made in federal tax laws – but a few do not and would also need legislative intervention to exclude infrastructure grants from taxability.

ISPs should reach out to legislators in the coming month to be heard on the issue. If this law doesn’t pass, I foresee grant recipients that will be unable to make the needed large tax payments immediately after accepting grant funding. This is one more item that will significantly add to the cost of accepting grant funding – and in many cases, will make it infeasible to accept funding for rural broadband projects that are barely going to break even.

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