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House GOP Tax Reform Plan Would Eliminate Tax-Exempt Private Activity Bonds, Including Bonds for Nonprofit Organizations

November 14, 2017

by Timothy J. Horstmann

On November 2, 2017 Representative Kevin Brady, chair of the House Ways and Means Committee, introduced the Tax Cuts and Jobs Act, House Republicans’ long-awaited comprehensive tax reform plan. Among many things, the Act if passed, would eliminate the tax exemption for private activity bonds.

Private activity bonds are used to finance a variety of facilities under current law. Among other things, they are used to finance airports, water and sewage facilities, facilities for the disposal of solid waste, certain manufacturing facilities, affordable housing projects, and projects for qualified 501(c)(3) tax-exempt organizations (e.g., colleges and hospitals).

If the Act is passed in its current form, any series of private activity bonds issued after December 31, 2017 would be federally taxable. Borrowers previously able to access capital on a tax-exempt basis would face higher costs due to the loss of tax-exemption. The elimination of tax-exempt private activity bonds would apply to both new capital projects, as well any refunding of an existing bond issued before the effective date of the Act. Furthermore, under existing regulations many restructurings of existing bonds could also trigger a determination of taxability.

The Act if passed could also affect private activity bonds structured as draw down loans, even where the loans were entered into before the effective date of the Act. Under existing technical guidance from the IRS, it is very likely that draws on such credit facilities occurring after the effective date, would be federally taxable, even if the facility itself was issued before the effective date.

Following the introduction of the Act, the Senate introduced its own version of comprehensive tax reform, and while the Senate plan proposes to eliminate tax-exempt advance refunding bonds (which would affect 501(c)(3) organizations), the plan does not call for the elimination of the tax exemption for private activity bonds. This is a welcome development and indicates disagreement between the caucuses regarding the future tax treatment of such bonds.

GOP leaders in the House and Senate, and the White House, have indicated a desire to pass comprehensive tax reform before the end of 2017. Whether that goal is feasible remains to be seen – but it is certain that many organizations will be affected by these changes should either proposal become law. Affected officials should contact their local federal elected officials to voice their support for the tax exemption for private activity bonds.

© 2017 McNees Wallace & Nurick LLC
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