Editor: Michael Dell, CPA
Credits Against Tax
On Sept. 30, the IRS announced that refundable credit payments processed on or after Oct. 1, 2013, and on or before Sept. 30, 2014, will be reduced by a sequestration rate of 7.2% for issuers of Build America Bonds, Qualified School Construction Bonds, Qualified Zone Academy Bonds, New Clean Renewable Energy Bonds, and Qualified Energy Conservation Bonds that elected to receive a direct credit subsidy under Sec. 6431.
Direct Pay Credit Bonds
Sec. 6431 allows certain bonds, which would generally qualify as tax-exempt under Sec. 103, to be treated as taxable bonds and allows the issuers to receive the equivalent of a federal tax credit. The state and local governments issuing these bonds are eligible to receive subsidies directly from the U.S. Treasury for amounts up to 35% of the coupon interest on the bonds. In theory, this allows the bonds to compete with other taxable-interest options in the marketplace while receiving a benefit directly from the federal government.
Effect of Sequester
On March 1, 2013, the automatic spending cuts required by the 2011 Budget Control Act, P.L. 112-25, took effect through sequestration. On the same day, the White House Office of Management and Budget issued a report detailing cuts to various agencies and programs, as well as reductions in a number of tax-related provisions, including Build America Bonds, Qualified School Construction Bonds, Qualified Zone Academy Bonds, New Clean Renewable Energy Bonds, and Qualified Energy Conservation Bonds payments.
In March 2013, the IRS announced a sequestration reduction rate of 8.7% for payments to affected issuers from March 1, 2013, through Sept. 30, 2013 (the end of the federal fiscal year—when the sequestration rate became subject to change).
FY 2014 Sequestration Reduction Rate
The September announcement from the IRS sets the sequestration reduction rate at 7.2% for refund payments processed on or after Oct. 1, 2013, and on or before Sept. 30, 2014—when the rate will again be subject to change.
The IRS instructs issuers to still complete Form 8038-CP, Return for Credit Payments to Issuers of Qualified Bonds, as they normally would. The IRS will notify issuers via correspondence if a portion of their requested payments are subject to the sequester reduction.
The reductions in refundable credits may result in revenue shortfalls, necessitating readjustments to the budgets of some issuers. Although the reduced subsidies could be changed before the end of the 2014 federal fiscal year by Congress, issuers should be prepared for the continued impact of the reduction in refundable credits until Sept. 30, 2014.
The issuers of bonds affected by the sequestration should still timely file Form 8038-CP to receive the majority of the tax credit subsidies afforded to them.
Michael Dell is a partner at Ernst & Young LLP in Washington, D.C.
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