Qualified Zone Tax Credit Bonds
Qualified Zone Tax Credit Bonds are a special type of tax credit available to banks, insurance companies, and other corporations actively engaged in lending money.
The Qualified Zone Tax Credit Bonds are also called Qualified Zone Academy Bonds, or QZABs. The credit was authorized by various pieces of tax legislation. The last one was the Working Families Tax Relief Act of 2004 which extended the program through 2005 with December 31, 2007 as the last day to issue bonds authorized in 2005. Qualified Zone Tax Credit Bonds are geared toward helping to provide financing for schools in low income areas.
The Government begins the program cycle by allocating around $400 million dollars in bonding authorization to the various States. This bonding allocation is determined based on the number of people in the State that are at the poverty level. The poorest States get the most allocation. Next, the State through its various qualified school districts issues bonds that may be purchased by Banks, Insurance Companies, or Corporations that engage actively in the business of lending money.
The interest rate on the Bonds is established daily by the Treasury Department. The Companies that receive the bonds receive their interest in the form of a tax credit that may be claimed on IRS Form 8860. The school districts that issue the bonds are not involved in the tax credit, of course, so the actual way of viewing their advantage is to understand that the Qualified Zone Academy Bonds are interest free bonds to the issuer.
The purchaser of the bonds receives interest, however. The interest is received in the form of the tax credit that may be taken directly off the taxes owed. The one disadvantage to the Qualified Zone Academy Bonds is that the benefit has no carry over and carry back provisions. The credit must be taken during the year it applies to or it is lost. This is not too much of a deterrent to most large lending institutions that will usually have a hefty tax obligation with the 35% business tax rate.
The Qualified Zone Tax Credit Bonds have not been extended past the 2004 law and the last ones must be issued before the end of 2007. The program was a unique way to provide funding to the school districts most in need of help and less likely to qualify for or sell normal bonds unless at high interest rates. The funds received for the bonds could be used for just about any school district related expense except for the construction of new schools. The program was aimed at the improvement of existing schools only.