Are Federal Broadband Grants Taxable?
Casey Lide of Keller and Heckman recently wrote a blog post warning that federal grant funding might be considered taxable income by the IRS. This unexpected tax liability could severely curtail the impact of federal grant programs designed to expand affordable broadband connectivity and close the digital divide. The Biden administration is weighing available options for using executive authority to exempt these projects, but a better remedy is for Congress to pass a clean and clear extension.
The main question is whether corporate grant recipients are required to report the grant funds as gross income. As Lide points out, the IRS determined in 2010 that the Broadband Technology Opportunities Program (BTOP) and Broadband Initiatives Program (BIP) grant funds did not need to be reported as gross income. Their determination relied on Section 118 of the tax code, which included an exemption of “property contributed to [a] corporation by a governmental unit.” However, the 2017 Tax Cuts and Jobs Act removed from the definition the exemption for “any contribution by any governmental entity or civic group.” As a result, new broadband projects supported by the American Rescue Plan (ARP) and the Infrastructure Investment and Jobs Act (IIJA) may now be considered “gross income” and therefore subject to taxation at a 21 percent rate.
This could severely hinder the impact of new federal broadband programs, including the $42.45 billion Broadband Equity, Access, and Deployment (BEAD) Program and the $2.75 billion Digital Equity Act. Providers, including those serving rural and underserved communities, would now face a massive tax liability, leading many to forgo participation in the programs. This also distorts the market by creating a preference for tax-exempt entities such as nonprofits, institutions of higher education, schools, and municipal providers over other private entities in a way that does not appear to be aligned with the legislative intent of the programs.
This confusion is likely the result of a technical drafting issue. There is no evidence that members of Congress wanted these funds to be taxable; they likely assumed the same exemption that protected the BTOP and BIP funds would still apply. They almost certainly did not intend to create new burdens for small and rural providers that might discourage their participation. But the ambiguity needs to be clarified quickly to ensure the success of the programs.
There are two potential ways of addressing the issue. First, the administration may be able to use existing executive authority to provide an exemption. The IRS has already clarified that emergency financial aid grants under the Coronavirus Aid, Relief, and Economic Security Act are not treated as taxable income. However, other projects supported by federal recovery funds have been deemed taxable. For example, grants from the $150 billion Coronavirus Relief Fund to business recipients are not excluded from the businesses’ gross incomes and are therefore taxable. The administration’s hands may be tied if it lacks sufficient authority to thread this needle and extend protections to these broadband projects.
Second, Congress could pass a technical fix to extend the exemption to broadband projects funded under the ARP and IIJA. This could possibly be attached to the supplemental COVID-19 relief bill making its way through Congress or the bipartisan innovation package that is going to conference in the coming weeks. In many respects, this may be the preferred approach as it would provide the legal certainty and clarity needed to encourage participation in the programs.
Regardless, there is a sense of urgency toward getting this clarification, given that states are beginning to develop broadband plans for the BEAD program and providers are making strategic decisions concerning their build-out plans funded by the federal programs.