Potential Elimination of Future Private Activity Bonds (including Qualified 501(c)3 Bonds), Advance Refundings, Tax Credit Bonds, New Market Tax Credits, and the Alternative Minimum Tax by the Introduction of the Tax Cuts and Jobs Act

On November 2, 2017, the House Committee on Ways and Means released a draft of its Tax Cuts and Jobs Act (the “Tax Bill”). The Tax Bill proposes to eliminate the federal tax exemption of interest income from all private activity bonds (e.g., exempt facility bonds, qualified 501(c)(3) bonds, qualified small issue bonds, qualified mortgage bonds, qualified redevelopment bonds and qualified veterans’ bonds), all tax credit bonds (e.g., qualified zone academy bonds, qualified energy conservation bonds, and new clean renewable energy bonds), all tax-exempt advance refunding bonds whether by governmental issuers or for the benefit of 501(c)(3) entities, and new market tax credits effective for bonds issued or tax credits created after December 31, 2017.  

In addition, the Tax Bill would eliminate the tax exempt status of bonds that finance the construction of, or capital expenditures for, certain professional sports facilities, effective for any such bonds issued after November 2, 2017.

One component of the Tax Bill that has positive ramifications for holders of tax-exempt private activity bonds is the proposed repeal of the alternative minimum tax (the “AMT”) for tax years beginning after December 31, 2017, which would result in such holders no longer being required to pay AMT on the interest earned on their holdings of such obligations.

Like any other proposed legislation, the Tax Bill is subject to multiple layers of revision before it is finally voted on in the House of Representatives and the Senate and submitted to the President for approval. Timing and likelihood of enactment of the Tax Bill are currently unknown.

In its introductory form, the Tax Bill does not remove the tax exempt status of existing private activity bonds or advance refunding bonds or affect tax credits created on or before December 31, 2017. Unlike prior tax reform legislation, however, which has historically provided detailed transition rules that describe the phasing-out of prior rules, the Tax Bill does not currently contain any transition rules or grandfathering provisions for future current refundings or reissuances in the event of any modifications to existing tax-exempt private activity bonds. It is therefore unknown at this time whether such refundings and reissuances will be permitted after December 31, 2017. In addition, it is unclear how draws under existing tax-exempt draw-down bonds that have not been fully advanced prior to December 31, 2017 will be treated.

Anyone considering a financing through the use of private activity bonds, or the refunding or modification of any existing private activity bonds described above (including borrowers, issuers, and financial institutions), should consult bond counsel.

This blog was written by Luisella McBride and Melissa Messina at Miles & Stockbridge.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.