WASHINGTON – Under a formula released by the Internal Revenue Service, most states are likely to have more new capacity to issue private-activity bonds in 2016 than they did this year.
State volume caps for 2016 will be the greater of $100 per capita or $302.88 million, the IRS said in Revenue Procedure 2015-53, which was released Wednesday and contains inflation adjustments for tax provisions. The per capita rate was the same as for 2015, but the minimum amount is higher than the $301.52 million amount for this year.
The amount of states' volume caps will be determined when the U.S. Census Bureau releases new state population figures later this year. States use the minimum cap rather than the per capita amount when they have small populations, so sparsely populated states will definitely have greater new capacity to issue PABs in 2016 than they do this year. More populous states will have larger new PAB volume caps if their populations have increased. In 2015, the only jurisdictions that saw a decline in both population and new volume cap were Illinois and Puerto Rico.
Most types of PABs -- including certain types of exempt-facility bonds, mortgage-revenue bonds, industrial development bonds, student-loan bonds and first-time farmer bonds -- are subject to state volume caps. States receive annual PAB volume caps and also can carry over any unused cap for up to three years.
In Rev. Proc. 2015-53, the IRS also provided numbers for 2016 that pertain to several other bond-related tax provisions.
PABs can be issued to finance loans for first-time farmers, and the maximum amount of a loan that can be financed by these bonds will be $520,000 in 2016, an increase from $517,700 in 2015, the IRS said.
When an issuer has to rebate arbitrage to the federal government, it can reduce the rebate amount by taking an annual credit for costs of computing the rebate. It computes arbitrage rebate at the end of a “bond year.” Typically an issuer will use the issue date as the start of its first bond year. For bond years ending in 2016, the credit will be $1,650, the same as the credit amount for bond years ending in 2015, the IRS said.
Additionally, the IRS maintained the numbers in its safe harbor rules for brokers’ commissions on guaranteed investment contracts or investments for yield restricted defeasance escrows.
If an issuer wants to use bond proceeds to purchase investments like GICs or securities for escrows, it will hire a broker to solicit bids for the investments. The safe harbor rules describes the costs of the broker's commission that are reasonable for an issuer to include, or treat as qualified administrative costs, when calculating the yield on the investments.
In 2016, as is the case in 2015, a broker's commission or similar fee for the purchase of a single GIC or investment for a yield-restricted defeasance escrow with the proceeds of a bond issue is reasonable if the amount of the fee the issuer treats as a qualified administrative cost is no more than $39,000 or 0.2% of the amount of the value of the investment, whichever is less. At a minimum, the issuer can pay a broker $4,000 and count that as a qualified administrative cost, the IRS said.
In addition, the broker's fee is reasonable if the issuer does not treat more than $110,000 of fees as qualified administrative costs for all GICs and investments for yield-restricted escrows purchased with gross proceeds of a single issue, the IRS said.
