What are Public-Purpose Bonds?
How Do Public-Purpose Bonds Work?
Let's assume ABC Town wants to bonds. Because the fund a project that benefits the general public, the municipal bonds will probably be considered public-purpose bonds. Although determining what projects truly benefit the general public may be controversial, the threshold for deciding whether a is private-purpose or public-purpose is usually whether private entities receive more than 10% of the proceeds and whether the project has broad social value.
The Tax Reform Act of 1986 created the distinctions between public-purpose and private-purpose bonds in an effort to limit the tremendous temptation municipalities faced to essentially act as commercial bands for private entities with projects that lacked substantial social benefit. The Act, which made the private-purpose bond a taxable , quelled much of this temptation. Toda, there are many kinds of public-purpose bonds (i.e., general bonds, revenue bonds, tax anticipation notes, etc.), but overall, these bonds fund projects such as roads, libraries, and infrastructure systems.
Why Do Public-Purpose Bonds Matter?
One of the largest advantages of taxes if the investor lives in the state or municipality issuing the ), but this exemption only applies to public-purpose bonds, and even then the IRS can apply the alternative minimum tax ( ) to the interest in certain circumstances. Thus, every investor must take the time to read his ' statements, learn whether his bonds are public-purpose or private-purpose, and understand his individual tax situation.
Municipal bond offering statements must carry the opinion of a qualified tax attorney stating whether the interest on the is taxable or tax-exempt according to the and other related laws. Municipal bond should also receive the same scrutiny, because if any of a 's bonds are private-purpose, investors could be subject to taxes there as well.