Manufacturers & Distributors ARTICLE -

Private activity bonds - Act soon to add more to your manufacturing facility for less

Target Audience: Manufacturing and Distributing Companies, M&D Industry Employees, Manufacturing Distributors

There’s nothing more satisfying than a good thing that gets even better — especially when it pertains to your manufacturing business. The American Recovery and Reinvestment Act of 2009, commonly referred to as the Stimulus act, has sweetened tax-exempt private activity bonds, which are available to finance “manufacturing facilities.” But better act soon — this expanded break is available for only a short time.

Private Activity Bond Background

Private activity bonds, which have been available to many manufacturers since 1986, are issued by local governments and certain state agencies. The government or agency sells the bonds to investors and uses the proceeds to make a loan to the manufacturer. The manufacturer must pay off the loan through payments to the bond investors.

Private activity bonds must be used for acquisition, construction, reconstruction, improvement of land or rehabilitation of a building. In addition, there’s a $10 million limit on the amount of a single bond.

Nontraditional Manufacturers

The normal terms of tax-exempt private activity bonds define a “manufacturing facility” as any facility used in the manufacturing or production of tangible personal property, which encompasses anything (excluding real estate) that can be physically touched, from cars to furniture to food.

But for bonds issued during the remainder of 2009 and in 2010, the Stimulus act expands the definition to include facilities used in the creation or production of intangible property. So, if your facility manufactures computer software or hosts the production of intellectual property, such as formulas and processes for developing pharmaceuticals, you can take advantage of these bonds.

Traditional Manufacturers

If you’re a manufacturer in the classic sense, you had the benefit of these bonds’ availability long before the Stimulus act. But that doesn’t mean the act’s private activity bond provisions won’t benefit you.

Private activity bonds can be used to finance a facility that’s “functionally related and subordinate” to a manufacturing facility and located on the same site. For example, you can use money from a private activity bond to finance the development of your parking lot, office facilities, storage facilities, and facilities for heating, cooling or trash disposal.

Ordinarily, only 25% or less of the proceeds from a tax-exempt private activity bond can be used to fund a related facility. The Stimulus act removes this stipulation through 2010.

AMT Risk Lifted

The Stimulus act excludes from the alternative minimum tax (AMT) any income on tax-exempt private activity municipal bonds issued in 2009 and 2010. In the past, tax-exempt interest from these bonds could trigger AMT liability. Moreover, the act excludes from the AMT tax-exempt interest from any 2009 and 2010 re-fundings of bonds issued after Dec. 31, 2002, and before Jan. 1, 2009.

How does this benefit manufacturers? Ordinarily private activity bonds must offer investors a higher interest rate than other tax-exempt bonds because of the AMT risk. With that risk temporarily lifted, investors likely will accept lower interest rates, which reduces the financing cost for the manufacturer.

A Great Way to Finance Your Facility

Nontraditional manufacturers can benefit from a financing alternative that normally isn’t available to them. And traditional manufacturers can enjoy a unique opportunity to fund the building of a related facility, such as a storage warehouse for unused machinery or an office building for your administrative staff.

Private activity bonds are typically obtained by submitting an application to the bond issuer, whether it’s the local government or a state agency. Your Manufacturing CPA can provide further insight on your state’s rules and guide you through the application process.

Take Advantage of Depreciation-Related Breaks This Year

The American Recovery and Reinvestment Act of 2009 also has extended some depreciation-related breaks:

• The 50% bonus depreciation. If you purchase and place into service qualified new assets for your business before Dec. 31, 2009, you can write off 50% of the assets’ adjusted basis.
• Increased Internal Revenue Code Section 179 expensing. The limit is $250,000 (up from $133,000) for assets purchased and placed in service in calendar year 2009 or during a fiscal year beginning in 2009. The phaseout threshold, which determines the maximum amount that can be spent while still receiving the full benefit, is $800,000 (up from $530,000). So, you can expense up to $250,000 during 2009, as long as your qualified equipment purchases don’t exceed $800,000.

Find out how our M&D accountants can add value to your business. Email us or call us at 1 (888) 875-9770.

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