Tax Law Change Needed to Protect Electric Co-op Tax-Exempt Status
Most of America’s electric cooperatives are tax-exempt organizations under Internal Revenue Code (IRC) Section 501(c)(12). In order to maintain tax exempt status, an electric cooperative must receive at least 85 percent of all income from its members. P.L. 115-97 amended Section 118 of the IRC to provide that contributions to a corporation by a non-shareholder government entity or civic group is no longer considered capital. Under prior tax law, such contributions were capital and excluded from the income of a corporation.
- Recent changes to the Internal Revenue Code created an unintended consequence for rural electric cooperatives. Government grants are now considered non-member income.
- If a government grant or reimbursement is not a capital contribution, then the grant may be considered non-member income and could jeopardize a cooperative’s tax-exempt status.
- As community-focused, member organizations, electric cooperatives must comply with the 85 percent-15 percent income test. No more than 15 percent of gross income may come from non-member sources.
- 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 the communities served by electric cooperatives, many of which are located in persistent poverty counties.