The IRS recently announced on its website that sequestration cuts to subsidy payments for Build America Bonds and other direct pay tax credit bonds will be 7.3% for the 2015 federal fiscal year, which started October 1, 2014. The 2015 fiscal year sequestration percentages were calculated by the federal Office of Management and Budget and ordered to take effect by President Obama. For FY 2014, the sequestration rate had been 7.2%, and for FY 2013 the rate had been 8.7%.
In addition to Build America Bonds, these sequestration reductions also apply to Qualified School Construction Bonds, Qualified Zone Academy Bonds, New Clean Renewable Energy Bonds and Qualified Energy Conservation Bonds. Sequestration cuts initially began on March 1, 2013, as a result of the Budget Control Act of 2011. The higher sequestration cut for the current fiscal year does not result from recent Congressional action but from implementation by the Administration of the 2011 Act. The sequestration cuts apply a single percentage to all non-exempt non-defense mandatory programs.
As a reminder, issuers should timely file IRS Form 8038-CP to request their interest subsidy payments, showing the full amount of interest paid and resulting credit payment, absent sequestration, owed to the issuer. The IRS will automatically apply the reduction and send a check for the subsidy amount net of the sequestration.