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Fiscal Cliff Legislation's Impact on Tax-Exempt Bonds

The exclusion from gross income of interest paid on tax-exempt bonds, including both traditional governmental bonds and private activity bonds, is largely unaffected by the fiscal cliff legislation. In fact, except for the inclusion of some specific extender provisions regarding certain tax credit and private activity bonds, the legislation does not address tax-exempt bonds.

While that is good news for both issuers of, and investors in, tax-exempt bonds, the exclusion from gross income of interest paid on tax-exempt bonds could still be targeted if comprehensive tax reform becomes a reality. While the most likely change for tax-exempt bonds to surface recently is a proposed cap on overall deductions/tax benefits for wealthy taxpayers, other changes that have been suggested and might resurface in further negotiations include a reduction in the types of projects that could be financed with private activity bonds or a further limitation on advance refunding transactions.

For issuers of direct pay tax credit bonds, the fiscal cliff legislation postpones the threat to the federal subsidy payments that would have decreased had sequestration gone into effect. Under the fiscal cliff legislation, the sequester (including the federal subsidy payments to issuers) would be implemented on March 27, 2013 if Congress were not able to come to an agreement on a deficit reduction plan.

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About this Author

Steven H. Gerdes, Tax Attorney, Bracewell Law Firm

Steve focuses his practice on the tax aspects of state and local government obligations. During his career, he has covered the full range of tax-exempt obligations appearing in the marketplace, including governmental new money, commercial paper and working capital financings, and current and advance refundings. These transactions also include exempt facility bond financings such as seaport and airport financings, student loan financings, solid waste and sewage financings, single- and multi- family housing financings, as well as professional sports facility and...

R. Todd Greenwalt, Tax Attorney, Bracewell Law Firm

Todd's practice focuses on governmental entities and tax-exempt organizations, advising clients with regard to tax-exempt financings and other business transactions, and resolving tax-exempt status issues.

His clients include all types of state and local governmental entities, hospitals, other health care organizations, colleges and universities, charter schools, museums, arts organizations, community and economic development organizations, private foundations, advocacy groups, and other charities. Todd serves as bond counsel and advises health care systems on the development of accountable care organizations, physician recruitment programs and joint ventures in compliance with IRS guidelines. He works with governmental entities and tax-exempt organizations to develop compliance procedures, including procedures for post-issuance compliance for tax-exempt financings.