Issue of New Tax-Credit & Direct-Pay Bonds Repealed

Issue of New Tax-Credit & Direct-Pay Bonds Repealed

Direct payment bonds have always encouraged investment in infrastructure in times of economic uncertainty. Unlike traditional municipal bonds, interest on direct payment bonds is taxable, making them attractive to non-taxable investors, such as pension funds. Instead of allowing investors to deduct the interest on the securities from their taxes, the federal government subsidizes the state or local issuer with a "direct payment" equal to a certain percentage of the interest rate. This model offers a more attractive interest rate for bondholders while reducing the cost of loans to local issuers.

Build America bonds were a type of direct payment bond issued during the Great Recession under the U.S. Recovery and Reinvestment Act 2009. They were created in response to disruptions in the municipal bond market - a drop of almost 70% in new municipal bond issues; and a 100% increase in financing costs by the end of 2008, to help states and local communities struggling to finance needed projects.

From April 2009 to December 2010, the federal government could grant a subsidy, equal to 35% of the interest rate, directly to local issuers or in the form of a tax credit for investors. During the program, all 50 states, the District of Columbia, and the two territories issued $ 182 billion in Build America Bonds. According to a Treasury Department report, the program has effectively boosted bond issuance and supported several infrastructure projects, including small businesses such as schools and community centers. In particular, issuers saved an average of 84 basis points on the cost of interest on 30-year bonds, equivalent to an estimated savings of $20 billion in borrowing costs under the program. These bonds' taxable nature has allowed state and local governments to accumulate net savings at the federal grant's cost. In other words, the federal investment was worth it.

What's New

The TCJA revoked the power to issue tax credits and direct payment bonds. The revocation applies to qualified forestry conservation bonds, new clean and renewable energy bonds, qualified energy conservation bonds, qualified sector academy bonds, and qualified school construction bonds issued after December 31, 2017. 

The determining tax credits are treated as eligible securities within the meaning of section 6431. The issuers of certain eligible tax credits issued before January 1, 2018, may choose from the date of issue of the bond by section 6431(f) to receive a refundable refund credit instead of tax credits per section 54A. Only eligible tax credit issuers who have elected to receive a refundable credit per Section 6431 (f) may submit Form 8038-CP, Credit Payment Statement for Qualified Issuers. 

If the issuer of a particular tax credit elects per Section 6431 (f), the security holder will not qualify for a tax credit by Section 54A. 

Other tax credit bonds, including qualifying forest conservation bonds, clean, renewable energy bonds, qualifying university zone bonds issued after a 2011 volume limit allocation (or later), and Midwestern tax credit bonds, are eligible for direct payments by Section 6431 (f).

Form 8038-TC is used by the qualifying tax credit bond and tax credit issuers listed below in the applicant to provide the I.R.S. with the information required in section 149 (e).

Who Must File: Qualify Tax Credit Bonds

Issuers of the following bonds must submit a separate Form 8038-TC for each Tax Credit Notes issue issued after 1 March 2010 and before January 1, 2018.

  • Clean, renewable energy bonds.

  • New clean, renewable energy bonds.

  • Qualified energy conservation bonds.

  • Qualified forestry conservation bonds.

  • Qualified school construction bonds.

  • Qualified zone academy bonds.

  • All other qualifying tax credit bonds (except Build America bonds to be reported on Form 8038-B, Notice of Build America Bonds and Recovery Economic Bonds).

Who Must File: Specified Tax Credit Bonds

Issuers of the following specified tax credits issued before January 1, 2018, must submit a separate Form 8038-TC for each specified tax credit issue.

  • New clean, renewable energy bonds.

  • Qualified energy conservation bonds.

  • Qualified school construction bonds.

  • Qualified zone academy bonds.

When to File

You are to file Form 8038-TC no later than the 15th of the second calendar month following the end of the calendar year in which the bond was issued. Form 8038-TC cannot be submitted before the issue date and should be completed based on the issue date's facts.

Form 8038-TC must be completed for specified tax credits at least 30 days before completing the first Form 8038-CP, which is completed to request payment on an interest payment date for this issue. Failure to comply with this form, including the attached annexes, may delay processing the form. All attachments must include the name of the issuer and the E.I.N. at the top.

Late Filing

An issuer may receive an extension of the deadline for filing Form 8038-TC if it is established that the filing omission was not due to willful negligence. Attach a letter to Form 8038-TC explaining why Form 8038-TC was not completed on time. Also, indicate whether the I.R.S is reviewing the securities' issuance in question. 

Do not send copies of the bond agreement or other bond documents.

If Form 8038-TC is completed late for certain tax credits, it must be completed 30 days before the first Form 8038-CP is completed for that issue.

Other Forms That May Be Required

For some tax credit issuers who elect, per Section 6431, to receive a direct payment of a refundable loan from the government, the refund must be requested on Form 8038-CP. Each Form 8038-CP can only reference interest paid on a single bond issue. Issuers of certain tax credits with different due dates must submit a separate Form 8038-CP for each due date.



Contact Member