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Broadband Grants Might Be Taxable

3/16/2010 7:22 AM Eastern

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

September