Broadband Grants Might Be Taxable

By John Eggerton -- Multichannel News, 3/15/2010 7:22:00 AM

Washington — Broadband-stimulus grant recipients need to get the number of a good tax attorney.

That was essentially the message from the Treasury Department to the National Telecommunications & Information Administration last week.

Utility regulators had sought some clarification from Treasury on the tax status of the grants issued under the Broadband Technology Opportunities Program, and specifically wanted a declaration that the billions in grant money would not be taxable gross income.

They only received half of the answer they sought. The National Association of Regulatory Utility Commissioners said that smart-grid stimulus grant recipients have been awaiting tax-status word before executing projects.

NARUC argues making the grants taxable would work against the goal of simulating the economy.

In a letter to Treasury Secretary Tim Geithner, top NARUC officials said the issue is critical and that grant recipients are worried: “If the Department of Treasury and the IRS determine that ARRA grants are taxable, it will significantly undermine congressional intent. It could ultimately increase costs to utility ratepayers NARUC’s members are charged to protect. It most certainly will curtail the scope of grant funded broadband infrastructure, mapping, and adoption projects.”

The NTIA has already handed out over $1 billion in grants for broadband deployment and adoption, focusing on “middle-mile” projects that get broadband to anchor institutions such as schools, libraries and community centers.

Treasury chief counsel William Wilkins responded in a letter to the NTIA that some broadband grants will be tax deductible — and others won’t.

Generally, a corporation’s gross income includes all income, including governmental grants, absent any exclusion.

There is an exclusion, though, for grants for capital expenditures to be used solely for acquiring capital assets to expand the business. Other criteria also must be met: funds must be used for working capital rather than compensation for service and must be of commensurate benefit to the size of the grant.

If those criteria are met, the grant is not counted as taxable gross income.

Grant money used for operating expenses is taxable as gross income, though recipients will be able to deduct business expenses, operating losses and other deductions.

The NTIA has $4.7 billion in grants to give out in two rounds to map broadband deployment and stimulate broadband development:

Total grants to date: $1.063 billion
Development grants: 59 grants, $961.4 million
Mapping: 54 grants, $102 million ]
SOURCE: Commerce Department