Many nonprofits lease their facilities because they think purchasing them would be too expensive or too difficult. There is a way, however, that nonprofits can purchase a facility, and that is borrowing through the issuance of tax exempt bonds. Such bonds are a low-cost technique that many nonprofits utilize.

Who can issue tax-exempt bonds?

Generally tax-exempt bonds are issued by a state or local government issuer which loans the bond proceeds to the 501(c)(3) organization. State law governs which state and local government issuers may issue bonds for 501(c)(3) organizations.

Can corporations issue tax-exempt bonds?

Generally, only state or local governmental entities are eligible actually to issue tax-exempt bonds (the “Issuer”). A 63- 20 corporation is the only type of nonprofit corporation that can itself issue tax-exempt bonds without having to apply to a public entity to do so.

How does tax-exempt bond work?

“Tax-exempt” means that the interest component of bond debt service payments is exempt from federal and sometimes state and local income taxes for the bond holder. Therefore, with regard to credit quality and term of the bonds, the interest rate will be lower than for a taxable bond.

What are tax exempt private activity bonds?

Private activity bonds (PAB) are tax-exempt bonds issued by or on behalf of a local or state government for the purpose of providing special financing benefits for qualified projects. The financing is most often for projects of a private user, and the government generally does not pledge its credit.

What are the advantages and disadvantages of investing in bonds?

Bonds pay regular interest, and bond investors get the principal back on maturity. Credit-rating agencies rate bonds based on creditworthiness. Low-rated bonds must pay higher interest rates to compensate investors for taking on the higher risk. Corporate bonds are usually riskier than government bonds.

What types of bonds are exempt from federal tax?

There are two types of tax-exempt municipal bonds, classified by how the money borrowed is repaid: general obligation bonds and revenue bonds. The tax-exempt sector includes bonds, notes, leases, bond funds, mutual funds, trusts, and life insurance, among other investment vehicles.

What is a tax-exempt bond?

A tax-exempt bond is an obligation of a state or political subdivision the interest on which is exempt from federal income taxation. The interest income is also usually exempt from income taxation of the state in which the issuer of the obligation is located.

What are tax-exempt private activity bonds?

What are tax-exempt bonds?

Can a non-profit issue a tax exempt bond?

Only governmental issuers can issue tax-exempt bonds. Non-profit entities may borrow using tax-exempt debt, but virtually all must do so via a “conduit financing” with a governmental entity. In a conduit financing, the governmental entity issues the bonds, then loans the bond proceeds it receives to the non-profit entity.

Why are tax exempt bonds good for government?

Because the holders of the bonds do not have to pay tax on the interest they receive, they are willing to accept a lower interest rate. In other words, tax-exempt financing allows governmental entities and tax-exempt borrowers to borrow at lower interest rates.

Can a taxable bond be used for private activity?

A Taxable Bond does not satisfy the requirements for a Federally tax-exempt Private Activity Bond, but usually pays interest that is exempt from state income taxation in the state of issue and may confer other benefits. In some localities, ad valorem and sales tax exemptions may be utilized through Private Activity Bond or Taxable Bond financing.

Are there any tax exempt industrial development bonds?

Federal tax law changes have restricted the use of tax-exempt industrial development bonds (IDBs) prompting communities to develop alternatives. In many jurisdictions “Taxable Bonds” can be issued with some of the same advantages.