Grant Funds are Still Taxable

In October 2022, I wrote a blog about a bipartisan attempt to exempt broadband grant funding from being taxable income. Unfortunately, Congress has still not moved this legislation forward. Any company pursuing any federal, and most state grants need to be aware of the tax implications.

In 2022 there was an attempt to push this through during the lame-duck session between the old and new Congress being seated. When that failed, there was a bipartisan bill introduced in both the House and Senate in February 2023, and those bills are still languishing.

On the House side, Representatives Jimmy Panetta (D-CA) and Mike Kelly (R-PA) introduced H.R. 889 – The Broadband Grant Tax Treatment Act. On the Senate side, Senators Mark Warner (D-VA) and Jerry Moran (R-KS) introduced an identical bill, S.341. Both bills would amend the federal tax code so that grants received from the Infrastructure Investment and Jobs Act and the American Rescue Plan Act will not be considered to be taxable income.

This would cover any funding that ultimately derived from ARPA funding, and I have to assume that it covers both state and local government grant awards made using ARPA funding. This would also presumably exempt ReConnect and NTIA grants that were funded through those two federal laws. But it might not exempt ReConnect funds that were directly funded in an Agricultural bill. The tax exemption would be retroactive for eligible grants awarded in 2021 and 2022.

In the past, the IRS had the authority to excuse grants from being taxable, and the agency excused the taxes on grants made from the NTIA’s 2009 BTOP and BIP grants. But the IRS lost that authority in the 2018 Tax Cuts and Jobs Act. It now takes specific action from Congress to forgive tax on grant income.

Most grant revenue is taxable. This makes sense because the majority of government grants are made to cover salaries for people like researchers – such grants are taxed as personal income like any other source of payroll. But there is a good argument to be made that grants for infrastructure are different. The whole point of the current broadband grants is to build infrastructure. A huge portion of the IIJA funding goes towards the labor of building a broadband network, a road, a bridge, a dam – and those payrolls from the grant funding are fully taxable. Most of the materials used in the grants are supposed to be made in America, and the profits from selling those materials is also taxable.

Fully taxing the infrastructure grant money and then also taxing the payrolls of the folks who build the grant-funded project feels like double taxation to me. We don’t tax corporations on gross sales. Corporations only pay taxes on profits, but most of the tax from sales to corporations comes from the taxes on the salaries paid to employees.

An argument can be made that grant revenue used for infrastructure isn’t taxable – but it involves an understanding of accounting to understand this. Corporations don’t get to immediately write-off the cost of building an asset. The cost of an asset, like a fiber network, is recognized as a tax deduction over time through depreciation. If a corporation depreciates a fiber network over thirty years, then it claims a little piece of the fiber asset as an expense for each of the thirty years.

But saying that an ISP will eventually get the money back ignores the practical impact of making infrastructure grants taxable. Grant money is given to ISPs as they build the network. If it takes three years to build a grant-funded fiber route, then the corporation gets the grant award spread over those three years. In each of those years the grant money is considered to be income. Assuming the corporation is already profitable, it will have to pay a 21% federal tax each year on the grant award. States with a state income tax will also expect the tax payment.

For sake of simplicity, let’s assume the total tax liability is 25%. If an ISP accepts a $40 million BEAD grant, it’s going to owe $10 million in taxes. Over the thirty years of deprecation its tax liability will theoretically get this money back, but the company will be required to write a big check to the tax authorities over each of the first three years. Note that taxes are more complex than this and that’s a simplified explanation.

That is a huge penalty for an ISP for taking grant funding. The company will have already made a 25% matching contribution to the grant project, which would be roughly be $13.3 million. In this simplified example, the ISP will have had to come up with $23.3 million to accept a $40 million grant.

This have huge implications for an ISP. First, while banks might fund the 25% grant matching, they are going to leery about funding the tax liability. ISPs in general don’t carry a lot of cash, so coming up with the tax liability is a big problem. This also makes the project a lot less profitable. My math shows that most rural grant projects are only minimally profitable even before considering this extra tax. BEAD grant areas, by definition, are sparsely populated, meaning there is not a huge amount of revenue generated. I honestly have not looked at a rural broadband project that could absorb this extra tax cost.

This extra taxation makes it a lot harder to justify taking a broadband grant. ISPs consider grant projects because they add customers and increase economy of scale. But nobody wants to take on a grant project that is a cash loser.

I can’t find any news about the topic. The House and Senate web sites show the bills still stuck in the Finance Committees. Perhaps this issue has been rolled into some other piece of legislation, but the folks I know who follow this haven’t heard about anything like that. If this legislation is still stuck in limbo, ISPs need to reach out to their congresspeople to reiterate the dire results of keeping these grants as taxable income. If this is not solved, it’s one more reason that many ISPs won’t be able to take BEAD grants. Only those ready to take on the extra tax liability can justify it – and most ISPs I know can’t afford this extra cost.

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