THIS IS AN ADVERTISEMENT.
Two bills recently introduced in the U.S. Senate, including the Small Business Infrastructure Jobs Tax Act of 2010, H.R. 4849 (the "Small Business Act") and the Municipal Bond Market Support Act of 2010, S. 3350 (the "Municipal Bond Act"), propose to extend several of the bond-related tax provisions implemented by the Economic Stabilization Act of 2008 (the "Stabilization Act") and the American Recovery and Reinvestment Act of 2009 (the "Recovery Act").
While these two bills have not been signed into law yet, the proposed extensions are expected to affect public finance markets as described in the paragraphs below. We are closely following the legislative progress of these bills and will provide further related updates to our clients as soon as possible.
A. Extension of Build America Bonds
The Recovery Act authorized three types of Build America Bonds: (1) "direct pay" Build America Bonds; (2) "tax credit" Build America Bonds; and (3) Recovery Zone Economic Development Bonds. Under current law, Build America Bonds may be issued until, and including, December 31, 2010. Build America Bonds are governmental (non-private activity) bonds the interest on which would be excludible from gross income for federal income tax purposes if an election to be treated as Build America Bonds were not made. To date, virtually all Build America Bonds issued have been direct pay Build America Bonds or RZEDBs as described below, each of which allows the issuer to receive subsidy payments from the U.S. Treasury Department equal to 35% and 45%, respectively, of the interest payable on the related bonds.
The Small Business Act, in its current form passed by the U.S. House of Representatives in March 2010 and introduced in the U.S. Senate for consideration, proposes to extend the Build America Bonds deadline from December 31, 2010 to March 31, 2013. Under the act, the current subsidy rate of 35% would be lowered to 33% in 2011, 31% in 2012 and 30% in the first three months of 2013. The Small Business Act also proposes to permit Build America Bond proceeds to be used to refund previously issued Build America Bonds.
B. Extension and Additional Allocations of Recovery Zone Bond Authority
The Recovery Act also authorized state and local governments to issue "Recovery Zone Bonds." There are two main types of Recovery Zone Bonds: (a) Recovery Zone Economic Development Bonds ("RZEDBs"); and (b) Recovery Zone Facility Bonds ("RZFBs"). Under current law, Recovery Zone Bonds may be issued until, and including, December 31, 2010. The Recovery Act designated a maximum volume cap of $10 billion to RZEDBs and $15 billion to RZFBs which were allocated to the states.
The Small Business Act, in its current form, proposes to extend the Recovery Zone Bonds deadline by one year to December 31, 2011. This Act also proposes to increase the volume cap limitation by an additional $10 billion for RZEDBs and $15 billion for RZFBs, to be allocated to the states by the U.S. Treasury Department.
C. Extension of Exemption from Alternative Minimum Tax
Under the Stabilization Act, Congress excluded certain tax-exempt housing bonds (a type of private activity bond) issued after July 30, 2008 from the alternative minimum tax ("AMT"). In order to temporarily improve the marketability of the remaining categories of private activity bonds (including qualified 501(c)(3) bonds and governmental bonds), the Recovery Act provided that (a) tax-exempt interest on private activity bonds would not be treated as a tax preference item for individual or corporate AMT purposes and (b) interest on tax-exempt bonds would not be treated as an adjustment to "adjusted current earnings." These two provisions of the Recovery Act combine to exclude corporations and individuals from AMT with respect to tax-exempt interest on bonds issued or treated as issued in 2009 or 2010 and apply for the life of such bonds.
The proposed Small Business Act would extend the AMT exemption through December 31, 2011 for all new private activity bonds, including bonds refunding obligations sold in and after 2003.
D. Extension of Bank Qualification
In order to improve the availability of bank financing for state and local government issuers and 501(c)(3) organizations, the Recovery Act implemented certain temporary changes applicable for governmental bonds and qualified 501(c)(3) bonds issued in 2009 and 2010. Such changes included increasing the dollar threshold from $10 million to $30 million with respect to the amount of "qualified tax-exempt obligations" which may be issued by "qualified small issuers" and purchased by financial institutions without being subject to the 100% interest expense disallowance rules (provided certain requirements under Section 265(b) of the Code are satisfied).
The Municipal Bond Act, proposes to make the $30 million threshold permanent and index such threshold for inflation.
For more information on Build America Bonds, Recovery Zone Bonds, the AMT exemption, bank qualification and other provisions relating to the Recovery Act, see "Key Municipal Bond Provisions in the American Recovery and Reinvestment Act of 2009" and certain other Peck Shaffer client alerts available here: http://www.peckshaffer.com/news.php
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To ensure compliance with requirements of the Internal Revenue Service under 31 CFR Part 10, Section 10.35, we inform you that, unless specifically indicated otherwise, any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (a) avoiding tax-related penalties under the Code or (b) promoting, marketing or recommending to another party any tax-related matter addressed herein. The Small Business Infrastructure Jobs Tax Act of 2010 and the Municipal Bond Market Support Act of 2010 have not been signed into law, and this communication is intended only to provide an update of ongoing legislative action.