A private activity bond (PAB) is a type of municipal bond whose proceeds are used to finance projects that are not owned or operated by a government entity. Typically, PABs are issued by state and local governments to finance projects that are privately owned, such as airports, housing developments, and infrastructure projects.
The interest on PABs is generally exempt from federal income taxes, and may also be exempt from state and local taxes in some cases. This makes PABs an attractive financing option for private entities, as they can often obtain lower interest rates than they would on a comparable taxable bond.
However, there are some restrictions on the use of PABs. In order to be tax-exempt, a PAB must meet certain requirements under the Internal Revenue Code, including a requirement that at least 10% of the proceeds be used for a "qualified purpose." Qualified purposes include manufacturing, agriculture, housing, and infrastructure.
PABs are also subject to "volume caps," which limit the amount of PABs that can be issued in a given state. The volume cap is designed to ensure that PABs are used to finance projects that would not otherwise be able to obtain financing, and not used simply to lower the cost of financing for a project that could be financed without the use of PABs.
The volume caps are calculated based on a formula that takes into account the state's population and taxable resources. For example, a state with a population of 10 million and taxable resources of $100 billion would have a volume cap of $300 million.
If a state exhausts its volume cap in a given year, it may still issue PABs, but the bonds will no longer be tax-exempt. In this case, the bonds are referred to as "taxable PABs."
How are private activity bonds allocated?
The answer to this question can be found by looking at the Internal Revenue Service's (IRS) website on the topic of private activity bonds. According to the IRS, private activity bonds are " bonds that are issued by state and local governments, but are not considered part of the government's exempt purpose debt." In order to be classified as a private activity bond, the proceeds of the bond must be used for "private business use" as opposed to "public use."
The IRS further explains that private activity bonds are allocated by state volume caps. The volume cap is the "maximum amount of private activity bonds that can be issued in a state each year." The state volume cap is set by the federal government and is based on the state's population.
Private activity bonds are generally used to finance projects such as airports, docks and wharves, solid waste disposal facilities, certain qualified residential rental projects, certain qualified highway or surface freight transfer facilities, and certain qualified private activity bonds. Are Build America bonds still being issued? Yes, Build America bonds are still being issued as of July 2020. Is qualified private activity municipal bond interest included in AMT? Yes, qualified private activity municipal bond interest is included in AMT.
What are tax-exempt bonds?
Tax-exempt bonds are municipal bonds that are exempt from federal taxes and from taxes in the state in which they are issued. They are sometimes called "munis" for short.
Interest on tax-exempt bonds is generally exempt from federal income tax, and may also be exempt from state and local taxes, depending on the laws of the state in which the bonds are issued. This makes them attractive investments for taxpayers in high tax brackets.
However, tax-exempt bonds may be subject to the Alternative Minimum Tax (AMT). In addition, the interest on some tax-exempt bonds, such as private activity bonds, may be subject to federal income tax.
Investors in tax-exempt bonds should be aware of the possibility of changes in the tax laws that could affect the tax status of these bonds. For example, the Tax Cuts and Jobs Act of 2017 eliminated the federal tax exemption for interest on private activity bonds issued after December 31, 2017. What is AMT exempt Div PAB? The AMT exempt Div PAB is a type of municipal bond that is not subject to the federal Alternative Minimum Tax. This makes them attractive to investors who are in higher tax brackets and would otherwise be subject to the AMT.