The Internal Revenue Service recently provided guidance on the Build America Bonds, which were authorized by the American Recovery and Reinvestment Act of 2009. These bonds allow state and local governments to issue taxable bonds in 2009 and 2010, in lieu of issuing tax-exempt bonds.
Build America Bonds generally include any taxable state or local governmental bond other than a bond issued to support a private activity. Consequently, Build America Bonds may not be used for a financing that benefits a private party, including 501(c)(3) healthcare organizations, but may be issued by hospitals that are owned by governmental entities. Build America Bonds may be structured as either tax credit bonds or direct payment bonds. Tax credit bonds provide a federal tax credit to the bondholder equal to 35 percent of the taxable interest they receive. Direct payment bonds provide the state or local government issuer with a federal subsidy equal to 35 percent of the interest paid on the bonds. Tax credit bonds may be used to finance any government purpose for which tax-exempt governmental bonds might be issued. Direct payment bonds, on the other hand, may be used only to finance capital expenditures.