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Membership Matters by CEO Brian Zelenak: October 2019

A Threat to Co-ops' Tax-Exempt Status

By Brian R. Zelenak

SCEC President/CEO

Due to an unintended consequence of current federal tax law, many electric co-ops are finding themselves in a precarious position.

Imagine working hard to secure funding for an important local project or reimbursement after a natural disaster, only to turn around and give a large chunk of that money back in taxes.

That’s the situation many cooperatives, including St. Croix Electric Cooperative, may face because of tax law changes. Depending upon the amount received, it could even jeopardize the not-for-profit tax status of cooperatives that receive federal or state government funding of any kind, including disaster relief aid, energy efficiency grants, economic development support and rural broadband development grants.

In order to maintain tax-exempt status, an electric cooperative must receive at least 85 percent of all revenue from its members. However, an unintended consequence of a 2017 change to federal tax law modified the calculation for some contributions by a government entity or civic group.

Now, grants and other contributions may be considered non-member revenue and could threaten a co-op’s tax-exempt status. This would have a profound impact on co-ops and their members. There is already an example right here in Wisconsin:

Last June, a submarine cable bringing energy from the mainland of Door County to Washington Island was severed unexpectedly. The island's electric cooperative qualified for $600,000 in state disaster aid, and the new state budget allocates $2 million ($1 million annually) to help cover the projects $ 4 million plus in costs. Even with significant state and federal aid, Washington Island had to significantly raise its monthly fixed fee to members.

With fewer than one thousand members, Washington Island Electric Cooperative has already lost its tax-exempt status for at least one year because of disaster relief funds being scored as non-member income in excess of the allowable 15 percent share.

Encouraging Congress to fix the tax code that exempts government grants from being defined as member revenue is one of the highest priorities of the National Rural Electric Cooperative Association, the service organization representing America’s electric co-ops. Legislation called the RURAL (Revitalizing Underdeveloped Rural Areas and Lands) Act has been introduced in both the House and the Senate, attracting large groups of bipartisan cosponsors. However, getting it enacted into law will be a heavy lift, given the political sensitivity of tax issues on Capitol Hill.   

Congress must act now to correct this unintended consequence and protect the tax status of electric co-ops. In doing so, Congress would preserve the full value of government grants that deliver societal benefits to our communities.

You can play an important role in encouraging Congress to act. Voice your support for the RURAL Act by visiting\ruralact.

Until next month,

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