USDA Broadband ReConnect Program: Round Three Review, Tips for Round Four
The United States Department of Agriculture’s (USDA) Rural Utilities Service (RUS) administers the ReConnect Loan and Grant Program. The ReConnect Program is a series of federally funded loans and grants for the deployment of broadband networks in unserved and underserved rural areas of the country.
This program has received significant and growing interest and could play a vital role in funding broadband deployment in rural areas for years to come.
Find out more about:
- When and why the USDA ReConnect Program was created?
- How much funding is available?
- What are the program requirements and qualifying criteria?
- How may ReConnect funds be used?
- What was learned from round three?
- How should applicants prepare for round four?
- What are the considerations of grants versus loans?
When and Why Was the USDA ReConnect Program Created?
The USDA implemented the ReConnect Program in 2019 to improve broadband access in rural areas.
The first round of the ReConnect Program commenced in 2019, the second round took place in 2020, and the third round is still in progress as of publication—applications were due in March 2022 and funds will likely be awarded in the second half of 2022.
In the first and second round of the ReConnect Program, unserved locations were defined as those where broadband wasn’t available at 10 megabits per second (Mbps) download and 1 Mbps upload (10/1 Mbps) by a fixed provider of terrestrial broadband, and participants are required to deploy broadband at speeds of at least 25/3 Mbps.
Fixed providers are those that provide broadband services utilizing fixed, nonmobile facilities, including copper, fiber, coaxial cable, and fixed wireless technologies. Terrestrial providers are those that don’t provide broadband services utilizing satellite facilities.
How Much Funding Is Available?
Round one of the ReConnect Program made $600 million of funding available; however, 76 recipients across 33 states received more than $656 million in funding.
Round two made $500 million of funding available; however, 105 recipients in 37 states received more than $852 million in funding.
ReConnect Available Funding and Awarded Funding
The USDA has had flexibility and additional funding available to award more than originally available. Round three of the ReConnect program will make at least $1.215 billion in funding available, with awards likely to be made in the second half of 2022.
The USDA indicated that it has the flexibility to award additional funding if it receives qualifying applications for more than the initially available $1.215 billion. More than 300 applications were received and released via public notice in late March and early April 2022.
In addition, the USDA received an additional $2 billion in funding for broadband deployment in the Infrastructure Investment and Jobs Act of 2021, which will presumably fund a fourth round of the ReConnect Program. The fourth round has tentatively been announced for late 2022.
What Are the Program Requirements and Qualifying Criteria?
ReConnect Program requirements and qualifying criteria changed substantially for round three.
Most notably, the definition of an unserved area changed from lacking access to 10/1 Mbps broadband—the threshold in rounds one and two—to lacking access to 100/20 Mbps broadband in round three.
To be eligible in round three, 90% of the proposed area must lack access to fixed, terrestrial broadband service of 100/20 Mbps.
Broadband speeds to be made available through ReConnect Program funds increased from 25/3 Mbps in rounds one and two to 100/100 Mbps in round three.
Program Requirements and Qualifying Criteria
Areas that receive federal high-cost support and other types of funding are eligible to participate in round three, but recipients of Rural Digital Opportunity Fund (RDOF) support must explain why additional funding is necessary to meet the RDOF deployment obligations.
In addition, recipients of other federal funding for the deployment of broadband in the same service area must explain how the ReConnect funding isn’t duplicative and won’t be used to fund the same investments.
Any business entity, including privately owned, cooperatively owned, Tribal, and governmental agencies are qualified to apply for ReConnect Program funding.
How May ReConnect Funds Be Used?
ReConnect Program round three funds must be used for the deployment of broadband facilities capable of providing at least 100/100 Mbps broadband service.
Funds may be used for qualifying pre-application costs associated with the development of the application, such as engineering, financial forecasting, and project management.
All ReConnect Program funds must be drawn within five years of the date that funds are made available to the applicant.
What Was Learned from Round Three of ReConnect?
ReConnect round three applications were submitted in March 2022, and the challenge process took place in April and May 2022. Awards are expected to start in 60–90 days from when applications were submitted.
As previously discussed, the biggest differences between the three rounds were the amount of funding available and different requirements for access to certain broadband speeds across the service area.
Funding Categories
Another difference is in funding categories for the three rounds. Rounds one and two had three different funding categories:
- 100% loan
- 50% loan and 50% grant combination
- 100% grant, including a 25% applicant match
In round three, a fourth funding category was added for Tribal lands and socially vulnerable communities, which are 100% grants with no applicant match required.
Scoring Criteria
Scoring criteria differed between rounds one and two and round three.
Round One and Two
Application scoring in rounds one and two focused heavily on the types of locations to be served, including farms, businesses, health care centers, educational facilities, and essential community facilities.
Round Three
The types of locations above weren’t considered in round three.
Round three scoring criteria focuses on:
- The proposed funded service area—how rural is it?
- The level of existing service available in the proposed funded service area
- The economic need of the area to be served
- Affordability of the services to be offered
- Applicant’s commitment to strong labor standards—with bonus points for non-private entities
- Vulnerability of the community
- Applicant’s commitment to providing wholesale broadband services and net neutrality standards
There are 10 scoring criteria being used in ReConnect round three, with various point amounts available on an all-or-nothing basis to total 17 points.
Only the funding categories that include grant funding are competitively scored using these criteria, while the 100% loan program is awarded on a first-come, first-served basis rather than being competitively scored.
The following criteria are considered for the competitively scored funding programs.
Rurality
Twenty-five points are awarded if the entirety of the proposed funded service area is more than 100 miles from a population center of 50,000 or more or if the population density is six or fewer.
Level of Existing Service
Twenty-five points are awarded if all locations within the proposed funded service area lack access to 25/3 Mbps or greater broadband service.
Economic Need
Twenty points are awarded if 75% or more of the proposed funded service area scores 20% or higher on the Census Small Area Income and Poverty Estimates Program.
Affordability
Twenty points are awarded if:
- The rates to be offered within the proposed funded service area are determined to be affordable to customers in the area
- The applicant commits to offering a low-cost service offering with broadband speeds sufficient for simultaneous remote learning and telework
- The applicant commits to participating in the Federal Communications Commission’s (FCC) Affordable Connectivity Program and Lifeline Program
Labor Standards
Twenty points are awarded if the applicant commits to strong labor standards for the proposed project, including compliance with the Davis-Bacon Wage Act and various other labor commitments.
Tribal Lands
Fifteen points are awarded to Tribal Government applicants, and 10 points are awarded to non-Tribal applicants, that will serve at least 50% Tribal lands.
Non-Private Applicants
Fifteen points are awarded to non-private, local government, and cooperative owned applicants.
Socially Vulnerable Communities
Fifteen points are awarded when 75% or more of the proposed funded service area falls within Socially Vulnerable Communities, as defined by the CDC.
Net Neutrality
Ten points are awarded if the applicant commits to the FCC’s net neutrality principles.
Wholesale Broadband Service
Ten points are awarded if the applicant commits to offering a reasonable and nondiscriminatory wholesale broadband service.
Challenges
There are a few challenges respondents face when applying for the ReConnect Program.
Competition
The USDA deemed 304 applications complete, beginning the 45-day public notice response process.
Evidence of Service
Broadband providers may submit a response to the public notice showing they can provide at least 100/20 Mbps to at least one location within the proposed funded service area.
Service Area Map
Respondents must provide a map of their service area that overlaps with the proposed funded service area.
In addition, respondents must provide:
- The number of locations within the proposed funded service area to which they’re capable of providing 100/20 Mbps broadband service
- The number of existing customers to which they provide broadband service in the overlap area
- The maximum download and upload speeds that they offer in the overlap area
- The name of a company technician that will be made available to assist in the USDA’s review of the response filing
Speed tests performed in the overlap area are accepted but optional.
How Should Applicants Prepare for Round Four?
Data from the first three rounds of the ReConnect Program can help applicants prepare for future rounds of funding.
Strategies
There are a few strategies applicants can implement to help boost their application.
Focus on High-Scoring Criteria
Applicants should be prepared to seek out the highest scoring areas within their service area and limiting their application to only those areas that meet multiple criteria.
The third round of ReConnect was the most competitive yet, and future rounds are likely to be even more competitive. Applicants can’t change scoring based on geographic areas defined by other programs—such as the economic need or social vulnerability of a community. But the proposed funded service area can be gerrymandered to produce the highest score possible.
In addition, there are scoring criteria applicants can meet if they’re willing to prepare in advance. For example, strong labor standards can boost a score, but the applicant must implement the provisions of the Davis-Bacon Wage Act, which requires significant preparation and knowledge prior to the application.
Prepare Early
All applicants, including those pursuing 100% loan funding, should prepare early, as 100% loan funding is awarded on a first-come, first-served basis.
Applicants should have:
- Engineering designs
- Network costing
- Location and subscriber data
- Environmental analyses
- Financial forecasts
Application Process Considerations
The application process is extensive and requires vast amounts of information and effort from a variety of internal departments and may also be dependent on assistance from external advisors.
It’s recommended to start the process early, dedicate the time necessary to prepare a thorough application and take a structured approach to the application process.
Applicants are generally provided with 90 days to apply once the Notice of Funding Opportunity is released, and in many cases, a complete and successful application may take the entire time. You will want to make sure that your entire team understands the relevant deadlines, knows their responsibilities, and works cohesively towards project completion.
Prepare for the application process by doing these tasks:
- Establish your USDA Electronic Authentication
- Gather all relevant corporate documents
- Prepare your historical financial statements in the RUS format
- Summarize location and subscribership data by area
Eligibility
All broadband providers are eligible to participate in the ReConnect Program except individuals and general partnerships formed with individuals.
Co-applicants aren’t eligible; one entity must submit the application.
To be eligible for ReConnect funding, an applicant must:
- Submit a complete application and all supporting documentation
- Demonstrate that the project can be completed within five years
- Demonstrate that the project is technically feasible
- Demonstrate that all project costs can be fully funded with grant, loan, or matching funds
- Show that the project is financially feasible and sustainable
- Demonstrate that the proposed broadband services will be provided for during the economic life of the assets or the term of the loan
Using the Funds
ReConnect loan and grant funds must be used for the intended purposes as identified in the application.
As with other USDA loan and grant programs, ReConnect funds can only be drawn down once evidence has been produced showing that costs have been incurred for the intended purpose and that service has been made available to customers.
Only pre-application expenses are eligible for reimbursement prior to service being made available to customers. As previously mentioned, the project must be complete and all loan and grant funds must be expended within five years when they’re first made available.
What Are the Considerations of Grants Versus Loans?
Companies should analyze the accounting policy that best fits their circumstances for grant proceeds received. The taxability of grants received may have significant impacts on the timing of cash flows and should be analyzed when undergoing the application process.
Accounting and tax considerations for loan proceeds remained unchanged from other loan programs.
Accounting for Funds
The accounting for grant proceeds will vary between funds received for projects in regulated service areas versus projects in nonregulated service areas.
Regulated Projects
Grants received for regulated projects will be accounted for as a reduction to the cost of the plant added in accordance with the FCC’s rules on aid to construction in Part 32.2000.
Nonregulated Projects
Companies that receive grants for nonregulated projects have the option to account for the proceeds as a reduction to plant or deferred revenue. Under the deferred revenue option, the liability is amortized over the average life of the plant placed in service.
The primary difference is the impact on the income statement.
Grant proceeds recorded as a reduction to plant will have lower depreciation expenses annually as the depreciable base is reduced by the grant amounts. Grant proceeds recorded as deferred revenue will result in higher depreciation expenses and increased revenue.
Net income should be comparable under each method. However, the accounting policy elected will impact the timing of tax payments and should be discussed with a tax advisor.
Loan funds received from the ReConnect Program are accounted for in the same manner as other loans.
Tax Implications of Grant Funding
Prior to the passing of tax law commonly referred to as the Tax Cuts and Jobs Act (TCJA), grant funding was considered a contribution to capital for tax purposes. With the TCJA, grants are now subject to tax.
However, when the amounts are taxed depends on whether funds are recorded as deferred revenue or as a reduction to the cost of plant on a company’s financial statements.
Reduction to the Cost of Plant
For amounts recorded as a reduction to the cost of plant, the grant proceeds are taxable when received. Because the amounts are recognized in taxable income, fixed assets aren’t reduced by the proceeds but for tax remain at their true cost.
This depreciation will allow for an offset of the grant income but can result in a disparity of when grant funds are received and when depreciation is allowed to be deducted, based on when the assets are in fact placed in service.
A company may have high taxable income in the year that grant funds are received if the associated assets are not put in service until subsequent years.
Deferred Revenue
For grant funds that are recorded in deferred revenue, the amounts are still considered taxable income and assets are recorded at their gross cost and allowed to be depreciated.
However, a company is allowed to defer the recognition of these funds for one year under IRC Section 451(c). This deferral can help the grant revenue be recognized in the same year that the associated fixed assets are placed in service so more expenses offset the income.
Bonus Depreciation
Additional consideration should be given to the expiration of bonus depreciation. Starting in 2023 bonus depreciation reduces 20% each year until it’s fully removed. For instance, the bonus depreciation percentage is 80% for assets placed in service in 2023, down from 100% for 2022.
In either situation the expense offset will happen over a period up to 15 years. This can create a significant tax burden for some companies, which should be a consideration when applying for and receiving any grant funding.
Are There Taxable Income Differences Between Grants and Loans?
As discussed above, the grant funds will generally be considered taxable, but timing of the taxability depends on the how things have been recorded for books. If a company receives a loan instead of a grant, the amount received in loan proceeds isn’t taxable. In both scenarios the assets are recorded at their gross cost and allowed to be depreciated.
The main consideration between grant or a loan is the overall cash flow impact. The loan proceeds will have to be paid back. A company that receives a $1 million loan must pay back that amount—plus any interest.
If the amounts are received as grants, then a company will have to pay tax of approximately $210,000 to $300,000. While proceeds aren’t taxable in a loan scenario, the overall cash payout will be more than if the funds are received as a grant.
We’re Here to Help
For guidance on round three accounting or future USDA ReConnect programs, contact your Moss Adams professional.
You can also visit our Communications & Media Practice for more information.