New Law Fixes Tax Problem for Utility Cooperatives’ Grants

On December 20, 2019, the President signed into law the RURAL Act, H.R. 2147, which fixes an error in the 2019 tax reform law (Public Law 115-97). The error was expected to result in taxation of government grants, and Section 501(c)(12) cooperatives believed it would result in non-member income. The RURAL Act amends Section 501(c)(12) to clarify that most grants should not be considered income under the Member Income Test.

The unintended consequence of the 2019 was discussed in our prior blog post.

H.R. 2147 was enacted as part of H.R. 1865 (Pub. L. 116-94). It applies to tax years beginning after December 31, 2017.

“(J) In the case of a mutual or cooperative telephone or electric company described in this paragraph, subparagraph (A) shall be applied without taking into account any income received or accrued from—

“(i) any grant, contribution, or assistance provided pursuant to the Robert T. Stafford Disaster Relief and Emergency Assistance Act or any similar grant, contribution, or assistance by any local, State, or regional governmental entity for the purpose of relief, recovery, or restoration from, or preparation for, a disaster or emergency, or

“(ii) any grant or contribution by any governmental entity (other than a contribution in aid of construction or any other contribution as a customer or potential customer) the purpose of which is substantially related to providing, con­struct­ing, restoring, or relocating electric, communication, broadband, internet, or other utility facilities or services.”.

What remains unresolved is how the 2019 tax reform law will impact taxable utility cooperatives, since the RURAL Act amends only the Member Income Test under Section 501(c)(12).