PRIVATE ACTIVITY BOND (PAB) – A municipal security the proceeds of which are used by one or more private entities. A municipal security is considered a private activity bond if it meets either of two sets of conditions set out in Section 141 of the Internal Revenue Code. A municipal security is a private activity bond if, with certain exceptions, more than 10% of the proceeds of the issue are used for any private business use (the “private business use test”) and the payment of the principal of or interest on more than 10% of the proceeds of such issue is secured by or payable from property used for a private business use (the “private security or payment test”). A municipal security also is a private activity bond if, with certain exceptions, the amount of proceeds of the issue used to make loans to non-governmental borrowers exceeds the lesser of 5% of the proceeds or $5 million (the “private loan financing test”). Interest on private activity bonds is not excluded from gross income for federal income tax purposes unless the bonds fall within certain defined categories (“qualified bonds” or “qualified private activity bonds”), as described below. Most categories of qualified private activity bonds are subject to the alternative minimum tax. The following categories of private activity bonds are qualified bonds under federal tax laws:
Exempt facility bonds – Private activity bonds issued to finance various types of facilities owned or used by private entities, including airports, docks and certain other transportation-related facilities; water, sewer and certain other local utility facilities; solid and hazardous waste disposal facilities; certain residential rental projects (including multi-family housing revenue bonds); and certain other types of facilities. Enterprise zone bonds are also considered exempt facility bonds. See: ENTERPRISE ZONE BOND; HOUSING REVENUE BOND – Multi-family housing revenue bonds.
Qualified 501(c)(3) bonds – Private activity bonds issued to finance a facility owned and utilized by a 501(c)(3) organization. Qualified 501(c)(3) bonds are not subject to the federal alternative minimum tax.
Qualified mortgage bonds – Private activity bonds issued to fund mortgage loans to finance owner-occupied residential property. Qualified mortgage bonds are often referred to as single family mortgage revenue bonds. See: HOUSING REVENUE BOND – Single family mortgage revenue bonds.
Qualified redevelopment bonds – Private activity bonds issued to finance certain acquisition, clearance, rehabilitation and relocation activities for redevelopment purposes by a governmental entity in designated blighted areas. Qualified redevelopment bonds are payable from general taxes or from tax increment revenues. See: TAX INCREMENT BOND.
Qualified small issue bonds – Private activity bonds issued to finance manufacturing facilities. Qualified small issue bonds may be issued on a tax-exempt basis in an amount up to $1 million, taking into account certain prior issues, or an amount up to $10 million, taking into account certain capital expenditures incurred during the three years prior and the three years following the issuance of such bonds.
Qualified student loan bonds – Private activity bonds issued to finance student loans for attendance at higher education institutions.
Qualified veterans’ mortgage bonds – Private activity bonds that are general obligations of a state issued to fund mortgage loans to finance owner-occupied residential property for veterans. The ability of states to issue new and refunding qualified veterans’ mortgage bonds on a tax-exempt basis is limited.