Tag: BTOP

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Are Broadband Grants Taxable?

Casey Lide of Keller & Heckman wrote a recent blog that warns that federal grant funding might be considered as taxable income by the IRS. This would be a dreadful outcome for any taxable entity that receives the grant funding since it would create a huge tax liability that would have to somehow be covered outside of the grant funding. This would not affect just the big telcos and cable companies but also the many small telephone companies and cooperatives which are also taxable.

This is not a new issue. There were a lot of questions about federal grants being taxable in 2009 when the NTIA awarded BTOP and BIP grants that were the result of the stimulus spending that came out of the recession. The IRS eventually declared a ‘safe harbor’ for those grants, meaning that it agreed to not tax the grant funding. But the threat of possible taxation stopped many of my commercial clients from pursuing those grants in 2009.

Lide points out that the IRS has always presumed that grant funding is income to the entity receiving the grant and is taxable. Consider a common type of federal grant such as when a research lab gets a grant to pay for the salaries of researchers. Such a grant has always been considered to be taxable income to the lab. The research lab doesn’t worry about this because when it spends that money for salaries, the expenses are deductible from the income, and the lab doesn’t incur any net tax liability. This is one of the reasons that this kind of grant is often awarded each fiscal year to give the grant recipient a chance to spend the grant money in the year the income is received.

But grants given to build infrastructure are different. If a corporation accepts a $10 million grant to build fiber, it cannot expense the fiber immediately to offset the income from the grant. IRS rules have always insisted that hard assets are written off over the economic life of the asset using depreciation expense. I haven’t checked lately, but the IRS suggested tax life for fiber has been set at 25 years, meaning that one-twenty-fifth of the cost of the fiber is recognized as an expense each year over 25 years.

In this example, the corporation that accepted the $10 million grant would be saddled with a $10 million revenue and only be able to wipe out a small portion of it in the first year using depreciation. That would create an instant federal tax liability of 21% on the difference between the grant and one year of offsetting depreciation expense, plus whatever state incomes taxes would be owed. The corporation could not use the grant funds to cover the tax liability – grant money can only be used to build infrastructure. The corporation would eventually see the benefit of depreciation on future taxes, but that relief would be glacially slow over 25 years – it would not stop them from having to write a big check to the IRS this year.

Lide points out the way that the IRS got around this rule with the 2009 grants. There was a legal case in the 1950s, Brown Shoe Co., Inc. v Commissioner where the courts rules that grant funding received by a shoe company for keeping their factory operating was not taxable since none of that money was used to enrich the owners of the business. The IRS was able to make this same determination with the BTOP and BIP grants because, by definition, none of the money was used to enrich the owners of corporations since it was all spent to build infrastructure.

Lide believes that there have been changes in the 2017 Tax Cuts and Jobs Act that might make it impossible for the IRS to make that same ruling for current federal grants. Congress could have avoided this issue by explicitly saying that the new grants aren’t taxable – but that’s not in the various laws.

This is very distressing news for a corporation that has already accepted grant funding from the CAREs Act or from ARPA funds because they might be facing an unexpected tax liability. I know cooperatives and telephone companies that have already accepted some of these funds and who will be shocked if this interpretation holds to be true. One of the problems we have currently in dealing with these kinds of issues is that the IRS is running several years behind and won’t have yet dealt with a tax return from a corporation receiving recent the latest infrastructure grants.

As a further word of warning, this same issue would apply to anybody accepting state infrastructure grants. A state would have to take positive action to forgive the grant from state income taxes, but that would not shield state grant revenue from federal tax liability. Any taxable entity that has already received CAREs or ARPA funding, or anybody thinking about taking ARPA or BEADs funding to reach out to legislators on the issue. It may turn out that Congress might be the only one who can fix this – they certainly didn’t intend for anybody building rural broadband to incur a huge tax penalty. If this doesn’t get resolved, many of the carriers who are planning on using grants to solve the rural broadband gap might have to drop out of the pursuit of grants.

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Building Fiber to Anchor Institutions

The Schools, Health & Libraries Broadband Coalition (SHLB) announced a strategy to bring broadband to every anchor institution in the continental US. They estimate this would cost between $13 and $19 billion. They believe this would act as a first step to bring broadband to unserved and underserved rural communities.

While this sounds like a reasonable idea, we’ve tried this before and it largely hasn’t worked. Recall that the BTOP program in 2009 and 2010 funded a lot of middle mile fiber projects that brought broadband deeper into parts of the country that didn’t have enough fiber. That program required the BTOP middle mile fiber providers to serve all anchor institutions along the path of their networks and was a smaller version of this same proposal.

We’re approaching a decade later and a lot of the communities connected by BTOP middle mile grants still don’t have a last mile broadband network. There are some success stories, so I don’t want to say that middle mile fiber has no value – but for the most part nobody is making that last mile investment in rural areas just because the BTOP middle mile fiber was built.

BTOP isn’t the only program that has built fiber to anchor institutions. There are a number of states and counties that have built fiber networks for the express purposes of serving anchor institutions. There are also numerous fiber networks that have been built by school systems to support the schools.

In many cases I’ve seen these various anchor institution networks actually hurt potential last mile fiber investment. Anybody that is going to build rural fiber needs as many ‘large’ customers as it can get to help offset building expensive rural fiber. I’ve had clients who were thinking about building fiber to a small rural town only to find out that the school, city hall and other government locations already had inexpensive broadband on an existing fiber network. Taking those revenues out of the equation can be enough to sink a potential business plan.

At least BTOP fiber required that the network owners make it easy for last mile providers to get reasonably priced backbone access on their networks. Many of the state and school board networks are prohibited from allowing any commercial use of their network. I’ve never understood these prohibitions against sharing spare pairs of government fiber with others, but they are fairly common. Most come from State edicts that are likely prompted by the lobbyists for the big carriers.

I’m sure I’ll take some flak for my position, but I’ve seen the negative results of this idea too many times in the real world. Communities get frustrated when they see a gigabit connection at a school or City Hall when nobody else in the area has decent broadband. I’ve even seen government staff and officials who have fast broadband in their offices turn a deaf ear to the rest of the community that has poor or no broadband.

To make matters worse, many of the BTOP networks have run into economic difficulties. The companies that invested in BTOP bought into the hype that the middle mile fiber networks would attract last mile fiber investments, and they counted on those extra revenues for long-term viability. But a significant portion of the BTOP middle mile networks ended up being fiber to nowhere. Companies funded by BTOP needed to bring matching capital, and a number of the BTOP providers have had to sell their networks at a huge discount and walk away from their unpaid debt since the revenues to cover debt payments never materialized.

This also raises the question of who is going to maintain the enormous miles of fiber that would be built by this proposal. Somebody has to pay the electric bill to keep the fiber lit. Somebody needs to do routine maintenance as well as fix fiber cuts and storm damage. And somebody has to pay to periodically replace the electronics on the network, which have an average economic life of around ten years.

I feel certain I will get an inbox full of comments about this blog. I’m bound to get stories telling me about some of the great success stories from the BTOP networks – and they do exist. There are cases where the middle mile fiber made it easier for some ISP to build last mile fiber to a rural community. And certainly a lot of extremely rural schools, libraries and other anchor institutions have benefitted from the BTOP requirement to serve them. But I believe there are more stories of failure that offset the success stories.

I seriously doubt that this FCC and administration would release this much money for any kind of rural broadband. But this is the kind of idea that can catch the interest of Congress and that could somehow get funded. There is no politician in DC who will take a stance against schools and libraries.

I can think of much better ways to spend that much money in ways that would bring broadband solutions many whole rural communities, not just to the anchor institutions. That’s not enough money to fix all of our rural broadband issues, but it would be a great start, particularly if distributed in a grant program for last mile projects that requires matching private investment.

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Federal Funding for Broadband Infrastructure

There is a lot of speculation that we might be seeing some money aimed at broadband due to the budget passed by Congress on February 9. That bill contains $20 billion for infrastructure spending spread evenly in fiscal years 2018 and 2019. On a floor speech as part of the vote, Senate Majority Leader Charles Schumer says the money will go towards “existing projects for water and energy infrastructure as well as expanding broadband to rural regions and improving surface transportation”.

Any broadband money that comes out of this funding will have to be spent quickly by the government. The fiscal year 2018 is already almost half over and ends on September 30 of this year. It’s likely that any grants coming out of such money would have to awarded before that September date to count as spending in this fiscal year. In order to move that fast I’m guessing the government is going to have to take shortcuts and use processes already in place. That probably means using the BTOP grant forms and processes again.

The short time frame for any of this funding also likely means that only ‘shovel-ready’ projects will be considered. But that aligns with statements made by the administration last year when talking about infrastructure projects. Anybody hoping to go after such grants better already have an engineered project in mind.

Assuming that funding follows the BTOP funding program, there were a few issues in those grants that ought to be kept in mind:

  • The grants favored areas that had little or no broadband. This is going to be more muddled now since a lot of rural America is seeing, or soon will be seeing broadband upgrades from the CAF II and A-CAM programs funded by the FCC. It’s doubtful that the big telcos are updating the national databases for these upgrades on a timely basis, so expect mismatches and challenges from them if somebody tries to get funding for an area that’s just been upgraded.
  • The BTOP grants required that anybody that wanted funding had to already have the matching funds in place. There were some notable BTOP failures from winners who didn’t actually have the funding ready, and I speculate tighter restrictions this time.
  • There were several requirements that added a lot of cost to BTOP programs – requirement to pay prevailing wages along with environmental and historic preservation reviews. There has been talk in Congress about eliminating some of these requirements, and hopefully that would happen before any funding. But that will take Congressional action soon.
  • The BTOP process surprisingly awarded a number of projects to start-up companies. Some of these start-ups have struggled and a few failed and it will be interesting to see if they make it harder for start-ups. The BTOP process also made it difficult, but not impossible for local governments to get the funding.

If there is going to be any money allocated for broadband, it’s going to have to be announced soon and one would think that deadline to ask for this funding is going to have to come soon – in very early summer at the latest.

The alternative to a federal grant program would be to award the $20 billion as block grants to states. If that happens it might be bad news for rural broadband. There are only a handful of states that have created state broadband grant programs. Any state with an existing program could easily shuttle some of this funding into broadband.

States without existing broadband programs will have a harder time. Most states will need legislative approval to create a broadband grant program and would also have to create the mechanisms for reviewing and approving these grants – a process that we’ve seen take a year in the few states that are already doing this.

It’s almost been two weeks since the budget was passed and I’ve read nothing about how the $20 billion will be used. Regardless of the path chosen, if any of this money is going to go to rural broadband we need to know how it will work soon, or else the opportunity for using the money this year will likely be lost.

 

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Broadband and Schools

English: Satellite Internet dish attached to a building in rural America (Photo credit: Wikipedia)

Earlier this month President Obama announced an initiative to get 1 Gbps or at least 100 Mbps broadband to 99% of schools within five years. The new plan is being referred to as ConnectEd and the citation takes you to a posting on the White House web site that outlines the program.

The program will have several components. The one that will be most familiar to the readers of this blog is that the program will provide improved connectivity through the E-Rate program that is part of the current Universal Service Fund. The E-Rate program for years has been providing subsidies to bring broadband to schools and libraries in the poorest communities. One has to imagine that the FCC is going to expand that program to include money to build fiber in rural communities. It’s not clear yet how it will work, but the administration has said that the NTIA (National Telecommunications and Information Administration) will take a lead in moving the program forward.

The second component of the plan will provide more training for teachers to be proficient in the technology that broadband will bring to the schools. This will be done with funding through Title II and Title VI programs through the Department of Education.

I don’t think there is anybody who can fault the goal of this plan which is to make sure that kids have access to broadband at school. Certainly students at schools that do not have broadband access will fall behind everyone else.

But for rural areas this is not enough. Over the last few years there has been a number of ‘middle-mile’ fiber networks built as part of the BTOP program using money from the 2009 Stimulus program that built rural fiber. The middle-mile projects built fiber through rural areas and also connect to ‘anchor institutions’ in those areas, meaning schools, universities, libraries and government buildings.

But in far too many cases those are the only places that got broadband out of the billions of dollars that were spent to build fiber. This is not a blanket indictment of the BTOP program because in some cases that fiber has been an incentive for carriers to build last mile fiber or wireless networks to serve rural customers. But I am also aware of many examples of BTOP fiber networks that bring fiber through a rural town, connect a school and a City Hall and nobody else.

And in many of those communities the existing broadband is poor or non-existent. It is very typical to have some sort of broadband in the towns in rural counties – generally DSL supplied by the phone company or cable modems supplied by a cable company. But in most cases the broadband in these towns is far slower than what is routinely available in big cities. But one generally only has to go a mile or two outside of these rural towns and the broadband stops. There are hundreds of counties that have this situation.

And in a lot of these areas without landline broadband there is also inadequate wireless broadband. Fiber is needed to provide broadband to cell towers if we want to use them to provide 3G or 4G data. Most rural cell towers were built along highways to serve cars and are not built where people live. And so in many rural areas there is no effective broadband.

And so it leads me to ask if there is not some way to help the communities around the schools while we bring broadband to the schools. 100 Mbps or 1 Gbps to a school is a great thing and I applaud this effort. But are we really helping rural students if once they leave school they don’t have enough broadband to do homework?

The original BTOP program that built fiber through rural communities did not go far enough. We need some way in this country to now build the rest of the fiber network and connect everybody. I would be a lot more excited about this announcement if it said that we were going to bring fiber to 99% of rural homes in five years.

I work with a lot of rural communities trying to get funding to build fiber and it is tough. These projects suffer from having a large infrastructure cost per household due to the sparse population in rural areas. These projects have a hard time getting funded through traditional funding sources like municipal bonds. If the federal government really wants to help rural areas get fiber they should be looking at ways that would help get rural fiber projects funded.

I don’t think it’s necessary for the federal government to step in and hand out the money to build rural fiber. That would probably just give us more BTOP programs and networks. But there are concrete steps the federal government could take that would make it easier to get this done. Rural communities are willing to pay for fiber themselves, but that desire is meaningless if nobody will lend them the money. So the best way to help rural America get broadband is to make it easier for rural communities to do it themselves. That is going to mean something like loan guarantees or lower interest rates for these projects.

The federal government already operates a ‘bank’ to provide rural broadband at the Rural Utility Service (RUS) that is part of the Department of Agriculture. But that money is so hard to obtain by rural governments that it might as well not exist. It would be easy to make the RUS into a functional program – it just takes the will to make it work.

In the last year we have had two big announcements at the federal level about broadband. One was to promote gigabit cities and now we will have broadband to 99% of schools. I am still waiting for the announcement that matters – to bring broadband to people.

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