Private Activity Bond - Explained
What is a Private Activity Bond?
Written by Jason Gordon
Updated at October 12th, 2021
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What is a Private Activity Bond?
A private activity bond (PAB) is tax-exempt security issued by a municipality or on behalf of a local government to fund a private project. The private projects financed through PAB are projects that benefit the larger community. Private activity bonds are fixed-income source of financing issued to fund special and qualified projects. Private activity bonds otherwise called Conduit bonds, Industrial Development Bonds, or Industrial Revenue Bonds. These bonds are issued to finance specific projects run by private entities.
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How Does a Private Activity Bond Work?
Local or state government often issue private activity bonds to attract private corporations and enable them execute projects for public benefits. PABs are Tax-exempt private activity bonds through which local or state government provide special financing for qualified projects and programs. There are specific criteria projects must meet before they qualify for special funding provided by the government through PABs. The common qualified projects that are financed by private activity bonds are;
- Private schools and universities
- Hospitals and health centres
- Airports
- Mortgage provision
- Funding students loan
- Rental houses, and others.
Private projects and programs that offer no public benefits are not financed by PABs. Examples of such include liquor store, gambling facility, private health club, golf course, and others. Private activity bonds offer an affordable financing for private entities seeking to execute projects and programs for public benefits. PABs are tax-exempt, no federal taxes is paid on their proceeds, however, there are certain cases where the bond pay taxes on interest. Generally, activities on PABs are guided under Section 103(a) of the Internal Revenue Code (IRC). In certain cases, municipal bonds are categorized as private activity bonds, this occurs when more than 10% of the proceeds of the municipal bond is used to fund private projects.