This Advisory is to alert you to certain tax provisions in the American Recovery and Reinvestment Act of 2009 ("ARRA") signed into law by President Obama on February 17, 2009. These provisions may be of particular benefit to small and mid-sized 501(c)(3) borrowers that are considering financing or refinancing capital costs on a tax-exempt basis. These changes should increase the appetite of banks to buy tax-exempt bonds directly and result in lower interest costs to the borrower.
In essence, the new law provides that for bonds issued in 2009 and 2010, banks can deduct 80% of the interest on debt allocable to their purchase of tax-exempt bonds from qualified small issuers whose annual bond issuance is less than $30 million if the bonds are designated by the borrower as "bank qualified." The law also makes clear that for conduit issues, the $30 million limit would apply to the individual borrower, not to the issuer. On pooled bond issues, again each borrower is treated individually, although all of the borrowers would have to qualify for the issue to be designated as bank qualified. Separately, the new law allows banks to deduct 80% of their "cost of carry" for their purchase of bonds, regardless of whether the bonds are designated as "bank qualified," up to an amount of bonds not exceeding 2% of the bank’s assets.
As a consequence, banks should be more interested in directly purchasing 501(c)(3) bonds, particularly for borrowers that expect to borrow less than $30 million in a calendar year, and at a lower interest rate reflecting their ability to deduct 80% of their "cost of carry." These rules would also apply to the refunding of existing tax-exempt bonds.