Tax Exempt Bond Compliance
The university borrows through the issuance of tax-exempt bonds to finance capital projects. The university also receives capital allocations from tax exempt bonds from the State of Ohio. Investors in Tax-Exempt Bonds are willing to accept a lower interest rate because interest earned on tax-exempt bonds is exempt from taxation. This exemption translates into a lower cost of capital for the University. The proceeds of the tax exempt bonds must be spent as required by the bond documents and the tax-exempt bond tax rules. These rules allow a very limit amount of the bond proceeds to be used in activities deemed to not be use by the University or other governmental or 501(c)(3) organizations.
The consequences of violating federal laws can be severe and can include retroactive loss of tax-exempt to the bondholder, significant liability to the IRS or bondholders, reputational damage, and the inability to use tax-exempt bond financing in the future.
The tax rules limit the amount of Private Business Usage or the amount of private payment or “security.” Compliance is typically maintained by limiting the Private Business Use (bad use) rather than by private payment or security.
The university’s tax exempt bonds will lose their tax-exempt status if more than 10 percent of the net proceeds of the bond issuance are used for any private business use (PBU). For governmental units, the private business use percentage is determined without including costs of issuance. These guidelines prohibit the approval of any use of tax-exempt bonds for PBU (bad use) in excess of 5 percent of a bond series’ net proceeds. PBU is measured separately for each outstanding bond issue throughout the term of the bond issuance.
PBU is use (directly or indirectly) in a trade or business carried on by any person other than a governmental unit or in related activity of a 501(c)(3) tax-exempt organization. Special legal entitlements to use tax-exempt bond-financed property result in PBU. Private business users include corporations other than 501(c)(3)s; 501(c)(3)s if their activities constitute unrelated trade or business for either the 501(c)(3) or the University; and government entities other than the fifty states and their subdivisions (i.e. federal government).
The following types of arrangements may give rise to PBU:
- Leases or use of university property
- Management contracts
- Sponsored research agreements
- Ownership
- Other actual or beneficial use of University property
The Tax & Treasury services Manager is responsible for tax exempt bond compliance. If you have any questions about tax exempt bonds or the annual survey, please email tax@kent.edu.