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Taxation of Bonds

Directive Statement

Tax-exempt bonds used to finance buildings and other capital improvements can produce a myriad of tax considerations, and Deans, Directors, and Department Chairs should be aware that these rules are very complex and seek the advice of the Office of General Counsel.  If these arrangements are not carefully reviewed by legal counsel, the results could be very costly and harmful to the University.

Reason for Directive

The purpose of this directive is to facilitate compliance with all federal tax rules and regulations related to the issuance of tax-exempt debt.  Generally, the interest paid to the bondholders is tax-exempt under Internal Revenue Code (IRC) section 103(a). However, the interest paid on private activity bonds is taxable.

Who must comply?

All university departments.

Procedures

  1. Notify the Office of General Counsel and the University Controller’s Office of any tax-exempt bond arrangements
  2. Prior to any changes in use of property or sales of property acquired with bond proceeds contact the Office of General Counsel
  3. Prior to the leasing or renting facility space that is financed by tax-exempt bonds to any third parties, contact the Office of General Counsel

Definitions

Tax Exempt Bonds

A bond usually issued by municipal, county, or state governments whose interest payments are not subject to tax.

Private activity bonds

Defined in IRC 141 as bonds of which 10% or more of the bond proceeds are used in a trade or business conducted by a nongovernmental organization, such as a private business, charitable organization, or individual (private business use test) AND of which the private security or payment test is also met.

Last Reviewed

05/01/2020: reviewed content

Resources

IRS Tax Exempt Bonds Information

Contacts

Tax Services: (352) 294-7266

University Controller’s Office: (352) 392-1321