Build America Bonds
Build America Bonds are a new type of bond whereby issuers may elect for governmental bonds to be issued as taxable bonds, with the bondholder to receive a federal income tax credit equal to 35% of interest payable, each year for the life of the bonds. (See also Recovery Zone Economic Development Bonds.) This type of bond is known as a tax credit bond.
Build America Bonds may be issued only in 2009 and 2010.
The bond interest and credit are treated as taxable interest for federal income tax purposes (similar to other tax credit bond provisions). However, as a “transitional measure,” the American Recovery and Reinvestment Act requires states to treat the bond interest and credit as exempt from federal income tax for purposes of state income tax (thus excluding the interest from state taxable income in states that use the definition of federal taxable income as their base, subject to adjustments for add-back of bond interest from outside the state).
Private activity bonds, including 501(c)(3) bonds, are not eligible for the Build America Bond provisions.
Issuer Credit Election
The issuer may make a second election to have the credit paid to it rather than to a bondholder.
The credit will be paid to an electing issuer as a “refundable credit” regardless of the fact that the issuer does not pay tax.
Other than amounts in a reasonable required reserve fund, proceeds of bonds for which the refundable credit is elected must be used for capital expenditures (i.e., no use of proceeds for operating deficits).
The refundable credit will be payable for the life of the bonds.
Application to Energy Financing Programs
Build America Bonds could provide funding for projects to be owned by a public entity, but may not finance improvements owned by or for the direct benefit of private parties.