Stimulus Act - Interest Expense Deduction for Banks Buying Municipal Bonds
Under prior law individuals and corporations were permitted to invest up to 2% of their assets in tax-exempt municipal bonds and deduct their interest expense costs for purchasing or carrying those bonds (the "de minimus" rule). Such deductions, however, were not available for banks. Under the American Recovery and Reinvestment Act of 2009 for bonds issued during 2009 or 2010, only, banks can deduct the interest expense allocated to the purchasing or carrying of such bonds, provided such bonds do not exceed 2% of the total assets of the bank.
This 2% safe harbor will not be available for bonds that refund bonds issued prior to 2009. Additionally, the interest would still be a "financial institution preference" item under Section 291 of the Internal Revenue Code meaning that 20% of the interest expense allocable is non-deductible. This 2% exception will apply to private activity bonds other than qualified 501(c)(3) bonds for non-profit institutions. Currently, many borrowers who had originally planned to finance their projects through variable rate demand bonds guaranteed by letters of credit issued by banks, have found that many banks are not currently in the market to issue letters of credit to back such bonds. Utilizing the 2% de minimus rule may permit banks as an alternative to purchase those bonds directly which, hopefully, would permit many of these projects to move forward.
Attorneys
- 502.568.0301
