skip navigation

Search Help
Navigation Help


Main Topics
A B C D E F G H I
J K L M N O P Q R
S T U V W X Y Z #


FAQs
Forms
Publications
Tax Topics


Comments
About Tax Map
IRS Tax Map 2008
Current IRS Tax Map

taxmap/pubs/p954-006.htm#TXMP68b2c187

Tax-Exempt Bond Financing


rule
spacer

Tax-exempt Bond Financing

State or local governments can issue enterprise zone facility bonds (a type of exempt facility tax-exempt bond) to raise funds to provide an "enterprise zone business" with "qualified zone property." At least 95% of the net proceeds from the bond issue must be used to finance:
  1. Qualified zone property whose principal user is an enterprise zone business, and
  2. Certain land used for a related purpose (for example, land where the business is located and a parking lot for customers and employees).
Tax-exempt bonds generally have lower interest rates than conventional financing.
Deposit
Contact the appropriate state or local government agency to find out if this type of financing is available in your empowerment zone or enterprise community.
taxmap/pubs/p954-006.htm#TXMP0ab458c2

Enterprise zone business.


rule
spacer

For tax-exempt bond financing, a corporation, partnership, or sole proprietorship is generally an enterprise zone business if all the following statements are true for the tax year.
  1. Every trade or business of the corporation or partnership is the active conduct of a qualified business (defined later) within an empowerment zone or an enterprise community. (This rule does not apply to a sole proprietorship.)
  2. At least 50% (80% for bonds issued before August 6, 1997) of its total gross income is from the active conduct of a qualified business within a zone or community.
  3. A substantial part of the use of its tangible property is within a zone or community. (For bonds issued before August 6, 1997, at least 85% of the use of its tangible property must be within a zone or community.)
  4. A substantial part of its intangible property is used in the active conduct of the business. (For bonds issued before August 6, 1997, at least 85% of its intangible property must be used in, and exclusively related to, the active conduct of the business.)
  5. A substantial part of the employees' services are performed within a zone or community. (For bonds issued before August 6, 1997, at least 85% of the employees' services must be performed within a zone or community.)
  6. At least 35% of the employees are residents of an empowerment zone or enterprise community. (This rule does not apply to businesses in the DC Zone.)
  7. Less than 5% of the average of the total unadjusted bases of the property owned by the business is from:
    1. Nonqualified financial property (generally, debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, and annuities), or
    2. Collectibles not held primarily for sale to customers.
For a sole proprietorship, the term "employee" in (5) and (6) includes the proprietor. Also, a business located in a zone or community that would qualify if it were separately incorporated is treated as an enterprise zone business. For example, a business that is part of a national chain could qualify, providing it would meet the definition of an enterprise zone business if it were separately incorporated.
taxmap/pubs/p954-006.htm#TXMP4bcf9007

Qualified business.
spacer

A qualified business is generally any trade or business except one that consists primarily of the development or holding of intangibles for sale or license.
However, the rental to others of real property located in an empowerment zone or enterprise community is a qualified business only if the property is not residential rental property and at least 50% of the gross rental income from the property is from enterprise zone businesses.
The rental to others of tangible personal property is a qualified business only if at least 50% of the rentals of the property are to enterprise zone businesses or zone or community residents. (For bonds issued before August 6, 1997, at least 85% of the rentals of the property must be to enterprise zone businesses or zone or community residents.)
Also, a qualified business does not include any business listed earlier in item (5) or item (6) under Nonqualified employees in the Empowerment Zone Employment Credit section.
taxmap/pubs/p954-006.htm#TXMP7dc18053

Relaxed requirements during start-up period.
spacer

For bonds issued after August 5, 1997, a business will be treated as an enterprise zone business during a start-up period if both of the following apply.
  1. It is reasonable, at the beginning of the start-up period, to expect the business to be an enterprise zone business by the end of the start-up period.
  2. The business makes bona fide efforts to be an enterprise zone business.
The start-up period is the period that ends with the start of the first tax year beginning more than 2 years after the later of the following two dates.
  1. The issue date of the bond issue financing the qualified zone property.
  2. The date this property is first placed in service (or, if earlier, the date that is 3 years after the issue date).
taxmap/pubs/p954-006.htm#TXMP223002bd

Requirements during and after testing period.
spacer

For bonds issued after August 5, 1997, a business that qualifies as an enterprise zone business at the end of the start-up period must continue to qualify during a testing period that ends 3 tax years after the start-up period ends.
After the 3-year testing period, a business will continue to be treated as an enterprise zone business as long as it meets an employee residency requirement. To meet this requirement, at least 35% of its employees must be residents of an empowerment zone or enterprise community. However, the following businesses are not treated as enterprise zone businesses even if they meet the employee residency requirement.
  1. Any business that consists primarily of the development or holding of intangibles for sale or license.
  2. Any business listed earlier in item (5) or item (6) under Nonqualified employees in the Empowerment Zone Employment Creditsection.
A business in the DC Zone does not need to meet the employee residency requirement to continue to be treated as an enterprise zone business after the testing period.
taxmap/pubs/p954-006.htm#TXMP0cf2d237

Qualified zone property.


rule
spacer

For tax-exempt bond financing, qualified zone property is any depreciable real or tangible personal property if all the following are true.
  1. You acquired the property after the zone or community designation is in effect.
  2. You did not acquire the property from a related person or member of a controlled group of which you are a member.
  3. Your basis in the property is not determined either by its adjusted basis in the hands of the person from whom you acquired it or under the stepped-up basis rules for property acquired from a decedent.
  4. You were the first person to use the property in an empowerment zone or enterprise community.
  5. At least 85% of the property's use is in an empowerment zone or enterprise community and in the active conduct of a qualified trade or business in the zone or community.
Used property may be qualified zone property if it has not previously been used within an empowerment zone or enterprise community.
taxmap/pubs/p954-006.htm#TXMP19a07e9e

Special rule for substantially renovated property.
spacer

Property will be treated as having met requirements (1) and (4) if you substantially renovate the property. You substantially renovate property if, during any 24-month period beginning after the zone or community designation takes effect, your additions to the property's basis are more than the greater of the following amounts.
  1. 15% (100% for bonds issued before August 6, 1997) of the adjusted basis of the property at the beginning of the 24-month period.
  2. $5,000.
taxmap/pubs/p954-006.htm#TXMP1390105d

Special rule for bonds issued after July 30, 1996.
spacer

Generally for bonds issued after July 30, 1996, property that you reasonably expect by exercising due diligence to be qualified zone property by an initial testing date will be treated as qualified zone property for the period before that date.
The initial testing date is generally the date that is 18 months after the later of the following dates.
  1. The issue date of the bond issue financing the qualified zone property.
  2. The date this property is first placed in service (or, if earlier, the date that is 3 years (5 years for certain construction projects) after the issue date).
However, the issuer of the bonds can choose to use any earlier date that comes after the bond issue date as the initial testing date.
taxmap/pubs/p954-006.htm#TXMP23086fda

Interest not deductible.


rule
spacer

No deduction will be allowed for interest on any financing provided from a bond if the interest accrues during the period beginning on the first day of the calendar year in which either of the following occurs.
  1. Substantially all of the facility that was financed ceases to be used in an empowerment zone or enterprise community.
  2. The principal user of the facility ceases to be an enterprise zone business.
This rule does not apply if the use of the facility ceases to qualify because of bankruptcy or the termination or revocation of the designation as an empowerment zone or enterprise community.
In addition, interest will remain deductible if the issuer and principal user try in good faith to meet the requirements and any failure is corrected within a reasonable period after discovery.
taxmap/pubs/p954-006.htm#TXMP72c0d733

More information.


rule
spacer

For more information, see section 1394 of the Internal Revenue Code and the regulations under that section.