Tax Reform Act Impacts Cooperatives, Part IV: Impact on Governmental Grants

Perhaps the most impactful aspect of the recent tax reform law is the change to the treatment of governmental grants.  Many cooperatives qualify for governmental grants in furtherance of their community benefits, such as electric, telephone, and broadband service and other low-cost goods and services.  The new law changes the exclusion previously available for these grants, forcing some cooperatives to recognize grants as taxable income or non-member income.

This post is the fourth in a series on the tax reform act’s impact on cooperatives.

On December 22, 2017, Congress’ new tax reform bill became law as Public Law 115-97 (the “Act”).  The Act substantially amends the Internal Revenue Code including provisions that directly impact cooperatives.

The Act amends Section 118, which governs contributions to capital of corporations.  Section 118 provides the general rule that gross income does not include contributions to the capital of corporations – meaning contributions to capital are not taxable.

So it is important to consider what is included in the definition of “contribution to capital.”  The Act amended Section 118 to now exclude “any contribution by any governmental entity or civic group. . . .”  As a result, most contributions by governmental entities are no longer excluded as “contributions to capital.”

The impact of this change could be considerable for cooperatives that receive governmental grants.  Arguably, taxable cooperatives will recognize most governmental grants as taxable gross income.  And exempt Section 501(c)(12) cooperatives would recognize such grants as non-member income.

Many cooperatives rely or intend to rely on governmental grants to fund important infrastructure projects, such as broadband projects or new or upgraded telephone and electric plant.  So depending on how the Act is construed, these projects may receive less funding than anticipated.

At this time, Treasury has not issued revised regulations, so we do not know how the Service will interpret the Act.  But cooperatives should purposefully consider the impact of the new law.