Municipal Bonds: Stimulus Bill Information

The stimulus bill modifies several federal tax laws affecting tax-exempt bonds including creating a two percent safe harbor and creating a new type of tax-credit bond called Build America Bonds. Recovery zone economic development bonds and manufacturing bonds and a number of other bond provisions are outlined in the stimulus bill.

Bank Qualified Bonds-Interest Expense Deduction: Bonds issued in 2009 and 2010 - Issuers may issue up to $30 million in bank qualified bonds (prior limit was $10 million). The stimulus bill deems the 501(c)(3) borrower as the issuer for purposes of determining the $30 million threshold. Private activity bonds and governmental bonds are eligible to be counted as bank qualified under new de minimus rule. Refunding opportunities exist with respect to many governmental or Section 501(c)(3) obligations not originally issued bank qualified.

Alternative Minimum Tax: Interest earned on tax-exempt private activity bonds is no longer an item of tax preference. The interest on any tax-exempt bond is not included in adjusted gross earnings in determining minimum taxable income of corporations. Refunding opportunities exist with respect to tax-exempt private activity bonds issued between 2004 and 2008.

Manufacturing Bonds: Financing manufacturing facilities - For new bonds issued, the requirements regarding the percentage of proceeds (currently 25 percent) that can be used for facilities have been relaxed so that the restrictions no longer apply to manufacturing facilities that are functionally related and subordinate to the manufacturing facility or located at the same site. The definition of manufacturing facilities is also expanded to include facilities used in the production of intangible property, such as patents, copyrights, formulas or similar items.

Build America Bonds: State and local governments may elect to issue these new type of bonds in lieu of tax-exempt government bonds. Under the program, bondholders would receive a credit tax equal to 35 percent of the taxable interest, or issuers may elect to receive such credit. The bonds must be issued prior to January 1, 2011.

Recovery Zone Economic Development Bonds: A new type of bond for recovery zones may be issued for the purposes of capital expenditures for public infrastructure, constructing of public facilities and expenditures for job training and educational programs in areas defined by state and local governments as having significant poverty, unemployment, home-foreclosure rates or general distress. Under the Recovery Zone Economic Development Bonds program, the federal government will provide issuers with an advance tax credit equal to 45 percent of the taxable interest on the bonds. The bonds have a national limitation of $10 billion to be allocated among states and within states on the basis of 2008 employment decline. These bonds must be issued prior to January 1, 2011.

Recovery Zone Facility Tax-Exempt Bonds: A new type of bond for facility financing in recovery zones must be used (95 percent or more of the net proceeds) to construct, reconstruct, renovate, or acquire moot projects. All property must be in the recovery zone to qualify. A national limitation of $15 billion is to be allocated among the states and within the states on the basis of 2008 employment decline.

Qualified School Construction Tax Credit Bonds: State and local governments may issue tax credit bonds to fund construction and rehabilitation of public school facilities. The national limitation is $11 billion for 2009 and 2010. Sixty percent of this will be allocated to the states in proportion to the respective amount of local educational grants received by each state under the Elementary and Secondary Education Act. The remaining 40 percent will be allocated to the largest local educational agencies in the nation.

Contact: James Snyder or Philip Genetos