02 Apr Stimulus plan expands bond opportunities for tech companies
In this column, I have asked my colleague, Lisa Lange, to let us know about an interesting wrinkle in the economic stimulus plan (also known as the American Recovery and Reinvestment Act, which we will refer to in this column as the “Recovery Act”) that could be of unique benefit to technology companies: bonds. This provision in the Recovery Act has not been widely published or discussed, but it may offer many technology companies a previously unavailable avenue to funds needed for expansion.
Among the many incentives included in the Recovery Act was the expansion of Section 144 of the Internal Revenue Code. The Code change relates to tax-exempt small issue industrial development revenue bonds, which now apply to any facility used in the creation or production of “intangible” property. This is quite different from prior law, which made such financing available only for the manufacture or production of “tangible” personal property. The use of “industrial revenue bonds” is not likely on the radar screen of many growing tech companies, but such bonds might be a useful tool as part of the overall financing package as the interest cost savings can be significant.
Section 144 of the Internal Revenue Code allows small manufacturers to issue (through a city, village, town or other local municipal issuer) industrial revenue bonds for capital projects, including the construction of manufacturing facilities, acquisition and rehabilitation of existing facilities and the purchase of new equipment. Interest on the bonds is exempt from federal income taxes to the holder; therefore, the conduit borrower (the manufacturer) enjoys an interest-cost savings of anywhere from approximately 20 percent to 40 percent off its conventional borrowing rate, depending on how the bonds are structured.
Pre-Recovery Act: Limited to manufacturers of tangible property only and use of proceeds primarily for core manufacturing
Prior to enactment of the economic stimulus plan, bond proceeds had to be used for capital expenditures (land, building, equipment) in connection with a “manufacturing facility”—defined as a facility where “tangible personal property” is changed in a way that adds value to such property. Further, from the proceeds of the bonds, at least 75 percent had to be used for core manufacturing space or equipment, with only 25 percent allowed to be used for facilities directly related and ancillary to manufacturing, such as office, warehouse, shipping/receiving and research and development space.
Post-Recovery Act: Bonds issued in 2009 and 2010 may finance facilities for the creation or production of intangible property and without limitation as to directly related and ancillary facilities located on the same site as a manufacturing facility
The definition of “manufacturing facilities” for purposes of the qualified small issue bond provisions has been expanded under the economic stimulus legislation to include facilities used in the creation or production of intangible property.
For this purpose, intangible property means any patent, copyright, formula, process, design, know-how, format or other similar items. Bio-tech, software developers and pharmaceutical companies and other companies that create or produce such property can now take advantage of these incentives and have tax-exempt bonds issued for their capital projects.
In addition, the scope of a manufacturing facility has been amended to replace the 25 percent allowance for directly related and ancillary property with an unlimited allowance for a functionally related and subordinate facility if such facility is located on the same site as the manufacturing facility. This eliminates the requirement that bond proceeds be used primarily to finance “core manufacturing” portions of a facility.
New opportunities for 2009 and 2010:
- Now biotechnology companies and other companies that create or produce intangible property may finance capital projects with tax-exempt bonds that formerly were not available to them.
- Projects can include an unlimited amount of proceeds for functionally related and subordinate facilities as long as they are located on the same site as the manufacturing (tangible or intangible) facility. Therefore, this may include unlimited research and development facilities (space or equipment), office or other functionally related and subordinate facilities.
Another benefit of the Recovery Act: Temporary repeal of Alternative Minimum Tax (AMT) for private activity bonds, including industrial revenue bonds, issued in 2009 and 2010
Another financial incentive under the Recovery Act is that the interest on private activity bonds issued in 2009 and 2010 (including industrial revenue bonds) will not be treated as a preference item for purposes of the alternative minimum tax, and also will not be included in the current earnings adjustment under the corporate alternative minimum tax. This change is also significant benefit to the conduit borrower and could result in an interest cost savings of 0.25 percent to 0.40 percent or more.
- Manufacturers (together with substantial users and related parties) must be “small,” meaning no more than $20 million in capital expenditures in a six-year period in the municipality in which the project is located.
- Each bond issue is limited to $10 million and bond proceeds must be spent within 3 years from the date of issuance.
- Only new (not used) equipment may be financed with proceeds of bonds.
- Existing facilities may be acquired but subject to rehabilitation requirement in an amount equal to at least 15 percent of amount of bond proceeds allocated to purchase the facility.
- All property financed must be depreciated on straight-line basis (no accelerated or bonus depreciation may be used).
- Only capital expenditures (and not working capital) may be financed with bond proceeds.
Industrial development revenue bonds (“IRBs” or “IDBs”) are neither government grants, nor obligations or liabilities of the issuing municipality. IRBs are essentially a bank loan dressed up in such a way that the interest on the bonds is exempt from federal income tax to the holder. The conduit borrower (that is, the manufacturer) needs to have a bank willing to underwrite the bonds and either purchase and hold them or issue a letter of credit to support the bonds if sold in the public market. The conduit borrower must have sufficient collateral to provide the bank to support the obligations and will be subject to typical loan covenants and agreements between banks and borrowers.
Additional tax incentives under the Recovery Act
There are a variety of other tax incentives under the Recovery Act that may or may not be tied to manufacturing. They include: Clean Renewable Energy Bonds, Qualified Energy Conservation Bonds, Recovery Zone Bonds (Recovery Zone Economic Development Bonds and Recovery Zone Facility Bonds), Advanced Energy Investment Credits for Manufacturers, Renewable Energy Investment Credit and Renewable Energy Production Credits. For more information on these incentives and how they may apply to your company, please contact Lisa Lange.
Sverre Roang heads the Corporate Transactions and Business Acquisitions Practice at the Madison office of Whyte Hirschboeck Dudek. Sverre is also the team leader of the firm’s Emerging & Entrepreneurial Companies Team. He may be reached at email@example.com or 608-234-6079.
The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of Wisconsin Technology Network, LLC. WTN accepts no legal liability or responsibility for any claims made or opinions expressed herein.