
INSIGHTS FOR FINANCIAL INSTITUTIONS	FEBRUARY 26, 2016

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Director of Financial Institutions
Gary Smith

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QZAB Limits Set for 2015 and 2016

The IRS recently released Notice 2016-20, which set the maximum amount of Qualified Zone Academy Bonds (QZAB) that can be issued for 2015 and 2016 by each state. Authorization for QZAB allocations for the years 2015 and 2016 was included among the so-called "tax extenders" contained in the Consolidated Appropriations Act, 2016 passed by Congress and signed by the president on December 18, 2015.

How QZABs Work

The QZAB program provides income tax credits to the holders of bonds-often banks-that are issued by state or local governments. The proceeds of the bonds are used for certain types of improvements and services by a public school, or an academic program within a public school, having a significant low-income student body below the postsecondary level, defined as a "qualified zone academy." QZABs are interest-free to the issuing schools. In effect, the U.S. government subsidizes the interest cost through income tax credits.

The QZAB tax credit rate fluctuates daily and is set by the U.S. Treasury with the intent to provide a benefit to the bondholder that approximates market interest rates on taxable corporate bonds. Banks investing in QZABs receive a dollar-for-dollar income tax credit each year they hold the bonds based on the QZAB tax credit rate, with the credit amount being included in taxable income.

As of February 18, 2016, the QZAB tax credit rate was 4.67 percent with a maturity of 26 years. Current rates can be found at the TreasuryDirect website.

Limitation and Allocation

The national QZAB limitation for calendar years 2015 and 2016 is $400 million per year and is effective for QZABs issued after December 31, 2014. The limitation amount is allocated among the states (including the District of Columbia and U.S. possessions) based on each states' "respective population of individuals below the poverty line (as defined by the Office of Management and Budget)." Each state then allocates its portion among eligible qualified zone academies within the state. Section 3 of IRS Notice 2016-20 sets forth the state-by state allocations.

An Effective Investment

Many banks have found QZABs to be effective additions to their bond portfolios to not only generate market returns, but also benefit their local schools and enhance their qualified investments for Community Reinvestment Act purposes. Should you have questions about QZABs and how the tax credits may fit into the overall tax planning for your bank, please call your local Eide Bailly tax professional.

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