Are Federal Broadband Grants Taxable?

Casey Lide of Keller & Heckman recently wrote a blog post warning that federal grant funding might be considered taxable income by the IRS. This unexpected tax liability could severely curtail the impact of these programs in expanding affordable broadband connectivity and closing the digital divide. There are two potential ways of addressing this issue. First, the administration may be able to use existing executive authority to provide an exemption. The IRS has already clarified that emergency financial aid grants under the CARES Act are not treated as taxable income. However, other projects supported by federal recovery funds have been deemed taxable. The administration’s hands may be tied if they lack sufficient authority to thread this needle and extend protections to these broadband projects. Second, Congress could pass a technical fix to extend the exemption to broadband projects funded under the ARP and IIJA. This could possibly be attached to the supplemental COVID-19 relief package making its way through Congress or the bipartisan innovation package which is going to conference in the coming weeks. In many respects, this may be the preferred approach as it would provide the legal certainty and clarity needed to encourage participation in the programs. Regardless, there is a sense of urgency in having this clarification given that states are beginning to develop broadband plans for the BEAD program and providers are making strategic decisions with respect to their build-out plans funded by the federal programs.

[John Bailey is a nonresident senior fellow at the American Enterprise Institute.]