Financial Management |
Article by Charles E. Procknow, George K. Baum & Company
Over the past 10 years, most independent school tax-exempt financings were structured as “direct purchases,” which typically have a clause that allows the bank to increase the interest rate (variable or fixed) in the event the bank’s tax rate decreases. Since the recent tax law changes decreased the corporate tax rate for banks from 35 percent to 21 percent, many schools are seeing their interest rates adjusted upward. The average increase appears to be about 0.60 percent (60 basis points), or $60,000 per year for a $10 million issue.
Some schools have not had to deal with this increase in their interest rate. This may be because the clause was not in their loan documents, or because the bank declined to change the interest rate. But all schools should clearly understand their loan documents to know whether the tax law change triggers a “reissuance.” Reissuance, an Internal Revenue Code term, requires certain regulatory steps to be taken to ensure tax-exempt financing remains tax-exempt. If your school’s bonds are subject to reissuance, not taking the proper regulatory steps may cause your financing to be declared taxable by the Internal Revenue Service, costing your school thousands of dollars in additional interest expense and potentially additional penalties.
If your school has a tax-exempt direct purchase with its bank, here are five possible scenarios:
From talking to counsel at Kutak Rock and Butler Snow, we at George K. Baum understand you'll need to take the following steps to properly document a reissuance and to preserve the tax-exempt treatment of your school’s debt:
Because the whole concept of reissuance can be daunting, we think it is important for schools to reach out to their counsel to walk through their specific situation to obtain clarity.
529 Plans: What We Know Now
New W-4s and Withholding Tax Calculator
Final Tax Bill Spells Some Relief for Independent Schools
Sign in to leave a comment
Get Net Assets NOW
NBOA's free twice-monthly newsletter
1400 I Street, NW, Suite 675Washington, DC 20005www.nboa.org