February 27, 2009
Denise J. Ganz, Esq.
Various provisions of the American Recovery and Reinvestment Act of 2009, signed into law by President Obama on February 17, 2009, impact tax-exempt bonds. These provisions may benefit local governments and financial institutions in a variety of ways. If you are an issuer of tax-exempt bonds or a financial institution involved in tax-exempt bond finance, the following provisions of the Act will be of interest to you:
• The ceiling for being able to issue “bank qualified bonds” is increased in 2009 and 2010 from $10 million to $30 million.
• 501(c) 3 and governmental conduit borrowers in 2009 and 2010 are treated as direct issuers for purposes of the bank qualification requirements and thus have separate $30 million limits.
• Tax-exempt bonds issued by a local government or for the benefit of a 501(c)(3) that were not bank qualified may be refinanced under certain circumstances so that the refunding bonds receive bank qualified treatment.
• The calculation of interest expense of financial institutions that is subject to disallowance will exclude tax-exempt obligations issued in 2009 and 2010 up to an amount equal to 25% of adjusted basis of the institution’s assets.
• Interest on new money bonds issued in 2009 and 2010 is no longer treated as a preference item for purposes of the alternative minimum tax and also is not included in the current earnings adjustment under the corporate AMT.
• Tax-exempt obligations issued on or after January 1, 2004 that are subject to the tax preference or adjusted current earnings of the alternative minimum tax may be refinanced under certain circumstances so that the refinanced debt is no longer subject to AMT.
• The definition of “manufacturing facilities” for purposes of the qualified small issue bond provisions is expanded to include facilities used in the production of intangible property for purposes of bonds issued in 2009 or 2010. Intangible property includes patents, copyrights, designs, know-how and other similar items. It is intended to include, among other items, the creation of computer software and intellectual property associate with bio-tech and pharmaceuticals.
• The scope of a “manufacturing facility” is amended with respect to bonds issued in 2009 or 2010 to replace the 25 percent allowance for directly related and ancillary property with an unlimited allowance for functionally related and subordinate property.
• A new category of tax credit bonds is created in 2009 and 2010 to finance the construction, rehabilitation and repair of public schools or for the acquisition of land for public schools.
• Issuers have the option of issuing taxable “Build America Bonds” prior to January 1, 2011. These bonds, which would otherwise qualify as tax-exempt, provide a taxable tax credit to the holder equal to 35% of the interest on the bonds or, at the election of the issuer, provide for direct payments from the Federal government to the issuer in lieu of the credit to bondholders. Private activity bonds are not eligible.
• A new category of taxable Build America Bonds, called Recovery Zone Economic Development Bonds, is created with authority for $10 billion of issuance in 2009 and 2010 to finance economic-development purposes in certain designated recovery zones. These bonds provide for a payment to the issuer of 45% of the interest paid.
• A new category of tax-exempt exempt facility bonds, called “Recovery Zone Facility Bonds,” is created with authority for $15 billion of issuance to finance depreciable property to be used in a recovery zone in the active conduct of a trade or business, subject to certain exclusions.
• Tax credit programs are extended or increased for Clean Energy Renewable Bonds, Energy Conservation Bonds, and Qualified Zone Academy Bonds.
The Act provides new and expanded investment opportunities for tax-exempt and tax credit bonds issued in 2009 and 2010. Attorneys in the Public Finance Practice Group are available to assist in maximizing the benefits provided by the Act for public finance matters.