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Qualified and Specified Tax Credit Bonds - General FAQs

Tax legislation enacted in 2008, 2009 and 2010 created several new types of tax credit bonds under the Internal Revenue Code.

  • Qualified zone academy bonds (QZABs) (see FAQs)
  • Qualified school construction bonds (QSCBs) (see FAQs)
  • Qualified energy conservation bonds (QECBs) (see FAQs)
  • New clean renewable energy bonds (New CREBs) (see FAQs)

What are qualified tax credit bonds?

Qualified tax credit bonds are bonds issued under section 54A that allow a credit to investors that hold such bond on one or more of the quarterly credit allowance dates.


What are the types of qualified tax credit bonds under IRC section 54A?

Four new qualified tax credit bonds were authorized under IRC section 54A in 2008-2010.

Two are school bonds:

  • Qualified zone academy bonds (QZABs)
  • Qualified school construction bonds (QSCBs)

Two are energy bonds:

  • Qualified energy conservation bonds (QECBs)
  • New clean renewable energy bonds (New CREBs)

For what purposes can tax credit bonds be issued?

Each of the tax credit bonds may be issued for different qualified purposes. In addition to complying with IRC section 54A, issuers of tax credit bonds must also comply with the IRC section that relates to each bond:

  • Qualified zone academy bonds (QZABs) – IRC Section 54E
  • Qualified school construction bonds (QSCBs) – IRC Section 54F
  • Qualified energy conservation bonds (QECBs) – IRC Section 54D
  • New clean renewable energy bonds (New CREBs) – IRC Section 54C

What is the Federal subsidy for qualified tax credit bonds?

  • QZABs and QSCBs - Bondholders receive a tax credit equal to 100% of the credit rate on the bonds.
  • New CREBs and QECBs - Bondholders receive a tax credit equal to 70% of the credit rate on the bonds.

The credit rate under section 54A(3)(b) that applies to all four types of tax credit bonds issued under IRC section 54A is set at a rate the Secretary of the Treasury estimates will allow the issuer to sell the tax credit bonds at par, without interest. That tax credit rate is published by the Bureau of Public Debt at www.treasurydirect.gov. The issuer applies the credit rate in effect on the first day there is a binding, written contract to sell the bonds, generally the date the bond purchase agreement is signed. This Federal subsidy reduces borrowing costs to the issuer.


How does the investor benefit from the tax credit?

The investor receives a tax credit, for QZABs and QSCBs equal to 100% of the credit rate on the bonds under section 54A(3)(b), and for New CREBs and QECBs equal to 70% of the credit rate under section 54A(3)(b) on the bonds.

The amount of the tax credit is includable in the investor’s gross income. The tax credit is generally allowed against both regular and alternative minimum tax. If the credit allowable exceeds the investor’s limitation for that taxable year, the unused credit may be carried forward until used. There are no restrictions on the type of investor who can purchase tax credit bonds.


What are specified tax credit bonds?

Specified tax credit bonds are:

  • QZABs, QSCBs, New CREBs, or QECBs that are qualified tax credit bonds under section 54A(d)
  • Issued after March 18, 2010
  • For which the issuer makes an irrevocable election to apply section 6431(f) to receive a direct payment subsidy instead of a tax credit allowed to investors.

For more information on specified tax credit bonds, see Notice 2010-35.


What is the Federal subsidy for specified tax credit bonds?

For each interest payment date, the issuer is allowed a direct pay refundable credit under section 6431(f) of the Code.

  • QZABs and QSCBs - the subsidy is equal to the lesser of the interest payable on the bonds or the interest which would have been payable if such interest were determined at the applicable credit rate under IRC 54A(b)(3).
  • New CREBs and QECBs - the subsidy is equal to the lesser of the interest payable on the bonds or 70% of the interest that would have been payable if such interest were determined at the credit rate under IRC 54A(b)(3).

For specified tax credit bonds, what is the benefit to the investor?

The investor receives taxable interest income on specified tax credit bonds that is includable in the investor’s gross income.


Is there a maximum maturity for qualified tax credit bonds and specified tax credit bonds?

Yes. The maximum term is determined by the Treasury Department under section 54A(d)(5) for purposes of Qualified Tax Credit Bonds generally. The maximum term for these tax credit bonds is the term that the Secretary estimates will result in the present value of the obligation to repay the bond principal being equal to 50 percent of the face amount of the bond. This present value is determined using a discount rate equal to the average annual interest rate of tax-exempt obligations having a term of 10 years or more that are issued during the month. The maximum maturity is published by the Bureau of Public Debt at: www.treasurydirect.gov. The issuer applies the maximum maturity in effect on the first day there is a binding written contract, generally when the bond purchase agreement is signed.


Previous tax credit bonds have a requirement that 95% of proceeds be used for a qualified purpose; does that rule apply to the new qualified tax credit bonds and to specified tax credit bonds?

No, the rules under IRC section 54A are very strict. The issuer must spend 100% of “available project proceeds” for a qualified purpose for the type of tax credit bond being issued. Available project proceeds are the sales proceeds the issuer receives from the bonds minus proceeds spent on costs of issuance (up to 2%), plus proceeds from investment earnings. Thus, investment earnings on tax credit bonds must also be spent for the qualified purpose.


May proceeds of the qualified tax credit bonds and specified tax credit bonds be used to fund a reserve?

No, the issuer must spend 100% of available project proceeds on a qualified purpose. Funding a reserve is not a qualified purpose. However, the issuer may fund a reserve from other sources. See the following question.


Will the arbitrage rules under IRC 148 apply to an issue of qualified tax credit bonds and specified tax credit bonds?

Yes, issues of qualified tax credit bonds and specified tax credit bonds are subject to section 148 of the Code. A special arbitrage rule applies to a reserve fund funded from sources other than available project proceeds of the tax credit bond. The reserve may be funded no more rapidly than in equal annual installments; in a manner reasonably expected to result in an amount not greater than necessary to repay the bonds; and the yield on such fund is restricted to the “permitted sinking fund rate.” The “permitted sinking fund rate” is set by the Secretary and is published by the Bureau of Public Debt at: www.treasurydirect.gov.


Because section 148 of the Code applies to specified tax credit bonds, how is calculation of the yield affected by the Federal subsidy cash payment allowed to the issuer under section 6431(f) of the Code?

The yield on specified tax credit bonds is calculated by reducing the amount of interest paid on the bonds by the amount of the Federal subsidy payments allowed to the issuer under section 6431(f) of the Code, without regard to amounts offset for delinquent debts owed to Federal and state government agencies.


Are there special expenditure rules for the proceeds of qualified tax credit bonds and specified tax credit bonds?

Yes, as of the issue date issuers of tax credit bonds must reasonably expect that 100% of the available project proceeds will be spent for one or more qualified purposes within the 3-year period beginning on the date the bonds are issued. In addition, the issuer must reasonably expect as of the issue date that a binding agreement will be entered into with a third party so that at least 10% of the expenditures are incurred within the 6-month period beginning with the issue date of the bonds. If the issuer does not meet the 3 year expenditure requirement, the issuer must redeem all of the nonqualified bonds (determined under section 142 of the IRC) within 90 days of the end of the 3-year period. The issuer may request, in instances where the failure is due to reasonable cause, an extension of the 3-year period.


Are qualified tax credit bonds and specified tax credit bonds subject to volume cap?

Yes, qualified tax credit bonds and specified tax credit bonds are subject to separate volume caps for each category of tax credit bond. Qualified tax credit bonds and specified tax credit bonds are not subject to section 146.


How are qualified tax credit bonds and specified tax credit bonds reported for purposes of section 54A(d)(3)?

Both tax credit bonds and specified tax credit bonds must be reported on Form 8038-TC, Information Return for Tax Credit Bonds and Specified Tax Credit Bonds.


How does the issuer of specified tax credit bonds apply to receive the cash payment subsidy from the Federal government?

The issuer of specified tax credit bonds must file Form 8038-CP, Return for Credit Payments to Issuers of Qualified Bonds.


How does an issuer “designate” the type of tax credit bond issued?

Prior to issuing tax credit bonds, the issuer must indicate on its books and records its designation of the bonds as QZABs, QSCBs, New CREBs or QECBs.


How does the issuer elect to issue specified tax credit bonds under section 6431(f)(3)(B)?

The issuer of specified tax credit bonds must make an irrevocable election to issue the bonds on its books and records on or before the issue date of the bonds.


What is the conflict certification required for tax credit bonds and specified tax credit bonds?

An issuer of tax credit bonds must certify that it has met the requirements of State and local law governing conflicts of interest with respect to the bond issue.


Do Davis-Bacon labor standards apply to all projects financed by qualified tax credit bonds and specified tax credit bonds?

Yes, Davis-Bacon labor standards apply to all projects financed by these new tax credit bonds. The Davis-Bacon contract clauses stated in 29 CFR 5.5(a)(1) through (10) must be incorporated into covered contracts for construction, alteration or repair work. Additional information regarding the application of Davis-Bacon labor standards is available at the U.S. Department of Labor Wage and Hour Division website at: www.dol.gov/whd/recovery/index.htm.


May state and local government entities use tax-credit bond issuance proceeds to purchase SLGS securities?

Yes. Proceeds of bonds issued under Internal Revenue code (IRC) sections:

  • 54 (Clean Renewable Energy Bonds),
  • 54A (New Clean Renewable Energy Bonds, Qualified Energy Conservation Bonds, Qualified Zone Academy Bonds (issued after October 3, 2008), and Qualified School Construction Bonds),
  • 1397E (Qualified Zone Academy Bonds issued after December 20, 2006, and on or before October 3, 2008, with respect to an allocation arising after 2005),

Proceeds of such bonds may be used to acquire SLGS for any situation in which the yield on the invested bond proceeds must be restricted, to include investments of proceeds in construction funds, reserve funds, and sinking funds under section 54A(d)(4)(C).

Page Last Reviewed or Updated: 02-May-2017