Tax-Exempt Status

Not-for-profit Cooperative Tax Status

Most electric cooperatives are exempt from federal income taxation under Internal Revenue Code section 501(c)(12). To maintain its exemption, an electric cooperative must collect 85 percent or more of its income from members for the sole purpose of meeting losses and expenses. The cooperative must also operate according to the cooperative principles of subordination of capital, democratic member control and operation at cost.

An exempt electric cooperative must pay tax on its unrelated business taxable income, which generally includes income from any trade or business not substantially related to the cooperative’s exempt purpose. If a rural electric cooperative loses its exemption, then it is taxed under the law existing in 1962, as well as other common law, governing cooperatives.

Federal Assistance

All electric utilities receive federal subsidies in one form or another. You may be surprised to learn that electric cooperatives receive the least amount of subsidy per customer.

The difference in federal subsidies for each type of utility becomes even sharper after considering that rural electric cooperatives typically serve sparsely populated areas: they have an average of 7.4 customers per mile compared to 34 for IOUs and 48 for municipal owned utilities.

Investor-owned Utilities (IOUs)

Investor-owned utilities take advantage of accelerated depreciation and investment tax credits. Federal studies have referred to this as an “interest-free loan.” The annual value of this major federal assistance to investor-owned utilities is estimated at $3.9 billion for 2012, making the subsidy to IOUs $38 per customer 1.

Municipal-owned Utilities (Munis)

Munis can issue tax-exempt bonds. The federal government loses revenue because the interest income to owners of these tax-exempt bonds is not taxed. The federal subsidy to munis in 2008 was $909 million or $55 per customer 2.

Electric Cooperatives (Co-ops)

Electric cooperatives are not-for-profit businesses. Under the current Internal Revenue Code, electric cooperatives are exempt from federal income tax so long as, on an annual basis, at least 85 percent of their income comes directly from their member-owners for the sole purpose of meeting losses and expenses of providing that service.

Some electric co-ops receive loans from the Rural Utilities Service (RUS.) The federal assistance is the interest subsidy (federal borrowing rate minus the RUS rate) on outstanding RUS loans. There was no subsidy in 2012. The cost of money to the government during 2012 was 2.92 percent, very low. The average interest rate on RUS loans outstanding during the year was 4.15 percent. Interest paid by RUS borrowers during the year therefore exceeded the cost to the government of carrying those loans thus the government made money on their investment in those loans 3.

Data Sources:
  1. U.S. Dept. of Energy (DOE/EIA) 2012 data.
  2. U.S. Dept. of Energy (DOE/EIA), Financial Statistics of Selected Publicly Owned Electric Utilities 2008. *516 municipal systems (out of approx. 2,000) reported statistics to DOE.
  3. U.S. Dept. of Agriculture (USDA), Rural Utilities Service 2012 data.