Wednesday, February 4, 2009
Two provisions in the current economic stimulus package ("The American Recovery and Reinvestment Act of 2009") that is pending in the U.S. Senate contain so-called "infrastructure financing" provisions that are likely to give a boost to infrastructure spending by all types of charities. The provisions provide incentives for individuals, banks and others to invest in "private activity bonds" which are tax-exempt bonds used by charities to fund building projects and other capital improvements. Here is a description of two infrastructure financing provisions from the Senate bill:
1. De minimis safe harbor exception for tax-exempt interest expense of financial institutions and modification of small issuer exception to tax-exempt interest expense allocation rules for financial institutions
Two-percent safe harbor for financial institutions - The proposal provides that tax-exempt obligations issued during 2009 or 2010 and held by a financial institution, in an amount not to exceed two percent of the adjusted basis of the financial institution’s assets, are not taken into account for the purpose of determining the portion of the financial institution’s interest expense subject to the pro rata interest disallowance rule of section 265(b). The proposal also amends section 291(e) to provide that tax-exempt obligations issued during 2009 and 2010, and not taken into account for purposes of the calculation of a financial institution’s interest expense subject to the pro rata interest disallowance rule, are treated as having been acquired on August 7, 1986. As a result, such obligations are financial institution preference items, and the amount allowable as a deduction by a financial institution with respect to interest incurred to carry such obligations is reduced by 20 percent.
Modifications to qualified small issuer exception - With respect to tax-exempt obligations issued during 2009 and 2010, the proposal increases from $10 million to $30 million the annual limit for qualified small issuers. In addition, in the case of “qualified financing issue” issued in 2009 or 2010, the proposal applies the $30 million annual volume limitation at the borrower level (rather than at the level of the pooled financing issuer). Thus, for the purpose of applying the requirements of the section 265(b)(3) qualified small issuer exception, the portion of the proceeds of a qualified financing issue that are loaned to a “qualified borrower” that participates in the issue are treated as a separate issue with respect to which the qualified borrower is deemed to be the issuer.
2. Repeal of alternative minimum tax limitations on tax exempt bonds issued in 2009 and 2010
The proposal provides that tax-exempt interest on private activity bonds issued in 2009 and 2010 is not an item of tax preference for purposes of the alternative minimum tax and interest on tax exempt bonds issued in 2009 and 2010 is not included in the corporate adjustment based on current earnings.
For a description of the entire economic stimulus package, see "DESCRIPTION OF THE AMERICAN RECOVERY AND REINVESTMENT TAX ACT OF 2009" available on the "legislation" portion of the Senate Finance Committee website.