Industrial Revenue Bonds
Category: Tax Credits and Financing
Many Reno County governmental units support the use of industrial revenue bond financing for the expansion and remodel of an existing building or the construction of a new building and production equipment. Sales tax exemptions on the building materials and property tax exemptions can be considered on a project-by-project basis.
In Kansas, IRBs are issued by cities, counties and the Kansas Development Finance Authority. Proceeds from the sale of the bonds to private investors are made available to enable creditworthy companies to purchase land and pay the costs of constructing and equipping new facilities or the costs of acquiring, remodeling and expanding existing facilities. If IRBs are used to finance certain types of facilities, interest payable to the owners of the bonds is exempt from federal income tax. This type of IRB is generally called a “tax-exempt” bond.
Interest payable on bonds issued to finance other types of commercial facilities, or to finance non-qualifying portions of an eligible facility, is subject to federal income taxation. This type of IRB is generally called a “taxable” bond.
Interest payable on all IRBs is exempt from Kansas income taxation. Because interest received by owners of tax-exempt IRBs is not subject to federal income taxation, the rate of interest on such bonds may be as much as 2 to 2.5 percent (average annual interest cost) below interest rates charged for a comparable taxable bond or taxable conventional loan. In many cases, IRBs afford long-term, fixed-rate financing not otherwise available for a business’ capital investments. Adjustable rate financing is also available to businesses that are willing to risk exposure to fluctuating (and potentially higher) interest rates.
In IRB financing, the bond issuer either directly loans the bond proceeds to a private business or acquires ownership of the property financed and leases it to the business. The loan payments or lease rentals are used to repay the bonds with interest. Typically, in a lease structure, the business is given an option to purchase the property at the end of the lease term for a nominal sum. Proceeds from the sale of the bonds are placed in escrow with a bank and used as directed by the business to pay eligible costs of constructing, acquiring and installing the facilities. The business may have up to three years to spend the proceeds of tax-exempt bonds on eligible property.
One benefit of IRBs issued by cities and counties is eligibility for full or partial property tax abatement for the financed facilities for up to 10 years and a sales tax exemption for labor and materials purchased for new facilities. These benefits apply to both tax-exempt and taxable bonds.
Issuance of IRBs by cities and counties is governed by Section 12-1740 et seq. of the Kansas Statutes Annotated. Kansas Development Finance Authority bond issuances are governed by Section 74-8901 et seq. Many bond issuers also have their own policies and regulations regarding issuance of IRBs and the granting of property and sales tax exemptions for the financed facilities.
For more information on IRBs click here.