As of now, $42.45 billion in federal broadband grants — as part of the Broadband Equity, Access and Deployment (BEAD) program — is taxable income due to the 2017 tax cut law.
In theory, grant-winning companies could recoup the money they would lose to the tax through bonus depreciation, but the amount they can offset starts to dwindle in 2023, said Ryan Johnson, a partner and CPA at Aldrich Advisors, which helps telecommunications companies. Next year — again thanks to the 2017 tax bill — the bonus depreciation rate will decrease to 80 percent, meaning that if a company were to win $10 million, only $8 million could be offset by bonus depreciation.
The bonus depreciation rate drops to 60 and 40 percent in 2024 and 2025, respectively.
For big companies like AT&T and Comcast, this new rule might not be a deal breaker, Johnson said. But for smaller companies — some of which are in the best position to provide Internet to very remote areas — the rule could dissuade organizations from applying for federal broadband dollars altogether.
"That will be enough for companies like mine to say, 'You know what, thanks for the free money, but no thank you,'" said Russ Elliott, CEO of rural company Siskiyou Telephone.
And that would potentially leave a lot of rural residents in the same Internet-challenged boat that they're in right now. Some smaller companies like Siskiyou Telephone are obligated to serve the most economically challenged sections of a county. Big companies, on the other hand, tend to avoid areas that have no clear return on investment.
"Not only do you have an area that will have no return on its investment, the area will not have the capability to offset the costs to operate the network if you start adding these types of liabilities [taxes] to the projects ... [Big] companies benefit from operating in higher-return markets," Elliott reasoned. "When you start to think about rural areas, these companies will not play in these deep rural areas."
The tax issue could also jeopardize digital equity for historically disadvantaged populations. When Elliott was director of the Washington State Broadband Office, he worked with 29 Native American reservations. He said the reservations "are the last to get any kind of services," and that the new broadband funds are there in part to make sure these populations finally get high-speed Internet.
Unfortunately, taxes on the grants would make it "insurmountable" for the reservations to build broadband infrastructure given how tribal economics work.
"Do they deserve broadband? You’re damn right they do … unfortunately they might end up not getting served. And that’s not acceptable," Elliott stated.
Johnson said he believes the tax issue can be solved by legislators if "we can show if that this is a burden against the intention of the infrastructure bill." Johnson mentioned two potential fixes: One option would be to make infrastructure grants exempt from the tax law requirement; the other would be to extend 100 percent bonus depreciation into 2023 and beyond.
To Johnson's point about the intentions of Congress, a recent analysis from American Enterprise Institute nonresident senior fellow John Bailey argues that Congress wouldn't have made broadband grants taxable on purpose.
"This confusion is likely the result of a technical drafting issue," Bailey writes. "There is no evidence that members of Congress wanted these funds to be taxable. ... They almost certainly did not intend to create new burdens for small and rural providers that might discourage their participation."
Bailey later speculated that perhaps the Biden Administration "may be able to use existing executive authority to provide an exemption" for BEAD applicants when it comes to the tax law.
Elliott said there has been an extreme lack of awareness about the tax issue in general. Elliott reached out to Washington Sens. Patty Murray and Maria Cantwell, the latter of whom is chair of the Senate Committee on Commerce, Science and Transportation. Neither senator indicated that they were aware of the grant tax, according to Elliott.
Another potential solution to the tax problem involves the rule-making authority of the National Telecommunications and Information Administration (NTIA), which will distribute BEAD funds to states. Johnson said NTIA could make rules that would allow for organizations to reconcile any financial losses due to taxes.
Evan Feinman, NTIA's lead for the BEAD program, didn't provide comment on the tax issue specifically. However, he expressed optimism about the hurdles the program faces.
"Getting broadband to all Americans is a project that’s going to include a number of challenges that need to be overcome — but those challenges can and will be overcome," Feinman told Government Technology. "At the conclusion of the BEAD program, every American will have the infrastructure they need to get online.”
