Electric coops and tax reform

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Publication August 9, 2018

Electric cooperatives are concerned that they will lose their federal income tax exemptions because of the tax reforms that were enacted last December.

Electric cooperatives are legal entities, usually in rural areas, that are formed to buy electricity for their members. By pooling electricity needs, they may be able to bargain for better prices from suppliers. Most, but not all, electric cooperatives are exempted from federal income taxes under section 501(c)(12) of the US tax code. However, to maintain the tax exemption, at least 85% of their income each year must be collected from their members “for the sole purpose of meeting losses and expenses.”

Rural electric cooperatives receive government grants for a variety of purposes, including installing broadband in rural areas, making energy efficiency improvements, and rebuilding after wild fires, tornadoes, floods and other disasters.

These types of grants have been viewed in the past as a form of capital contribution. However, the tax reform bill last December requires contributions by “any governmental entity or civic group” to be reported as income. The coops are concerned that this will cause them to lose their tax exemptions under the 85% test, the National Rural Electric Cooperative Association said in a letter to the House tax-writing committee chairman and ranking Democrat in early July.

The trade association is also asking Congress to clarify how rents that coops receive from leasing spare capacity on fiber optics lines affect the 85% calculation. The tax code lets coops ignore income from qualified pole rentals.


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