A little-noticed provision in the 2017 tax reform law could threaten the non-profit status of rural electric cooperatives if they use federal disaster aid or take advantage of a new initiative to expand broadband service. 

The provision in the Tax Cuts and Jobs Acts means that government grants to co-ops, including disaster aid and assistance through a rural broadband program Congress enacted earlier this year, are now taxable, according to a letter the National Rural Electric Cooperative Association has (NRECA) sent to the congressional tax-writing committees. 

Under Section 118 of the old tax law, a corporation’s gross income excluded any contribution to its capital. Under the new law, contribution to capital now excludes “any contribution by any government entity or civic group," the letter says. 

Because co-ops receive a variety of government grants, including disaster recovery and energy efficiency assistance, the provision could mean the grants will be considered non-member income for purposes of meeting the 85-percent member-income requirement for maintaining non-profit status, the letter says. Co-ops can receive no more than 15 percent of their revenue from non-member sources and remain tax exempt. 

To protect their tax exempt status, co-ops could be forced to turn down federal disaster assistance funding, which could lead to significantly higher electric rates, according to NRECA.

And many co-ops are eager to use the new broadband funding, “but the unintended consequence fo the changes to Section 118 serves as a significant barrier," the letter said. 

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Kirk Johnson, NRECA's senior vice president of government relations, said the tax provision was driven by congressional concerns about the benefits that states and local governments have been offering to corporations in luring them to re-locate. "We want to make sure that there is no unintended consequence of having co-ops losing their tax exempt status because they want to provide broadband or have a big disaster. That’s not the intent of the law," he said.