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Broadband grants awarded under programs established by the American Rescue Plan Act (ARPA) and the Infrastructure Investment and Jobs Act (IIJA) could be subject to federal corporate income tax, effectively requiring corporate recipients of grant funds to return 21 percent of it to the federal government.

While the IRS has in the past declared a “safe harbor” from taxation for certain broadband grants (specifically, BTOP and BIP grants, in 2010), doing so now could be more challenging due to statutory changes adopted as part of the 2017 Tax Cuts and Jobs Act, as described below.

If not conclusively addressed, the taxation issue could significantly blunt the positive impact of broadband grants made under ARPA and the IIJA, including the massive $42 billion infusion forthcoming under the BEAD program. Entities expecting to receive grant funds would need to budget for the tax bill, potentially requiring a reduction in the scope of their project. Entities might also consider structuring a project so that grant funds are received by tax-exempt entities.

This blog post provides a high-level overview of these issues. Please note that the following is a greatly simplified discussion provided for general informational purposes only. It is not intended to serve as legal advice and should not be treated as such, especially with respect to an individual entity’s tax status.

1. In general, federal grants are taxable.

As a starting point, the receipt of a government grant by a business is generally not excluded from the business’s gross income under the Internal Revenue Code and is, therefore, taxable.[1] “A federal grant is ordinarily taxable unless stated otherwise in the legislation authorizing the grant.”[2] (A government loan, on the other hand, is not taxable, because it must be paid back.)

2. “Nonshareholder contributions to capital” (Brown Shoe Co., Inc. v. Commissioner).

While the general rule states that a federal grant is taxable income, a doctrine first enunciated in 1950 has provided a basis to hold that a federal grant can be excluded from gross income. In the 1950 case of Brown Shoe Co., Inc. v. Commissioner, the U.S. Supreme Court considered the tax treatment of cash and property received by a shoe company from community groups as an inducement to locate company facilities in the community.[3] The Court held that the income received by the shoe company from the community groups represented “contributions to capital” by nonshareholders, and could, therefore, be excluded from income. The Court’s reasoning emphasized that the contributions to the shoe company by the community were made for a community benefit, and not in exchange for direct service, “their only expectation being that such contributions might prove advantageous to the community at large.”[4]

3. IRC Section 118.

In 1954, Congress enacted IRC Section 118, which directly addressed nonshareholder contributions to capital and essentially codified the Brown Shoe Co. holding. The general rule of Section 118 was that gross income of a corporation does not include any contribution to its capital. As a 2018 publication from Deloitte notes, Section 118 “went on to say that a contribution to capital did not include any contribution in aid of construction or any other contribution from a customer or potential customer, meaning that these amounts were taxable and included in gross income. This meant that other non-shareholder capital contributions could be excluded from a corporation’s gross income.”[5]

4. 2010 BTOP and BIP grant programs: IRS Rev. Proc. 2010-34.

In the American Recovery and Reinvestment Act of 2009, Congress created two significant broadband grant programs: The $4 billion Broadband Technology Opportunities Program (BTOP) administered by NTIA, and the $2.5 billion Broadband Initiatives Program (BIP) administered by the U.S. Department of Agriculture’s Rural Utilities Service.   The BTOP and BIP programs presented the same taxation issue as that currently before us: would corporate grant recipients be required to report the grant funds as gross income?

In 2010, the IRS pronounced that BTOP and BIP grant funds need not be reported as gross income.[6] In doing so, the IRS relied entirely on the aforementioned Section 118. The IRS said: “Section 118(a) of the Code provides that in the case of a corporation, gross income does not include a contribution to the capital of the taxpayer. Section 1.118-1 of the Income Tax Regulations provides that section 118 applies to contributions to capital made by a person other than a shareholder, for example, property contributed to a corporation by a governmental unit for the purpose of enabling the corporation to expand its operating facilities.”[7] On this basis, the IRS said it would not challenge a corporate taxpayer’s exclusion of BTOP and BIP grant funds from gross income.

Based on the IRS’s 2010 determination, one might reasonably assume that broadband grants made under ARPA and IIJA programs could be safely classified as non-taxable income, with the IRS perhaps needing only to update its 2010 determination (which dealt specifically with BTOP and BIP) to apply to the new grant programs. Unfortunately, a 2017 legislative change has complicated the situation.

5. The 2017 Tax Cuts and Jobs Act.

The 2017 Tax Cuts and Jobs Act (TCJA) significantly amended IRC Section 118.[8] Most relevant for our purposes, the TCJA added an exception to the definition of “contribution to the capital of the taxpayer” so that the term no longer includes “any contribution by any governmental entity or civic group….”[9] As the Deloitte paper notes, “[t]he TCJA left unchanged Section 118’s general rule that contributions to capital are not included in gross income. What did change is the addition of language to Section 118 that makes grant proceeds from governmental entities or civic groups to a corporation taxable upon receipt as gross income….”[10]

In short, the legislative changes adopted in 2017 seem to foreclose the rationale used by the IRS in 2010 to allow BTOP and BIP grant funds to be exempt from taxation.

6. What Now?

As explained above, broadband grant funds received by corporations under ARPA (for example, as a subrecipient in a project funded under the Coronavirus State and Local Fiscal Recovery Fund), or under the forthcoming IIJA programs (including the BEAD program) could well be “gross income” subject to taxation at a 21 percent rate. Such an outcome would be clearly contrary to the objectives of ARPA and the IIJA and would hamstring national efforts to deploy vitally needed broadband infrastructure.

Prompt action by the IRS would resolve the issue, but after the 2017 TCJA, it is unclear whether and how the IRS would be able to do so. If the IRS is unable to solve the problem, Congressional action may ultimately be necessary.


[1] Internal Revenue Service, “CARES Act Coronavirus Relief Fund frequently asked questions,” accessed 3/1/2022.

[2] Internal Revenue Service, Publication 937 Business Reporting, IRS Pub. 937, 1989 WL 508466 (1989).

[3] Brown Shoe Co., Inc. v. Commissioner of Internal Revenue, 339 U.S. 583 (1950).

[4] Id., at 591; see, e.g., U.S. v. Chicago, Burlington, and Quincy Railroad Co., 412 U.S. 401 (1973).

[5] Deloitte, “Tax Reform Impacts on Section 118,” Journal of Multistate Taxation and Incentives, Vol. 28, No. 6, September 2018.

[6] Internal Revenue Service Rev. Proc. 2010-34.

[7] Id.

[8] See James Adkinson, “State and Local Location Incentives:  Reminder That the Rules Have Changed,” The Tax Adviser, June 1, 2019.

[9] 26 U.S.C. § 118(b).

[10] Deloitte, supra.