BABs Compliance

In order to comply with the Build America Bonds (BABs) program a bond must meet an established set of criteria.  The bonds must qualify for tax exemption under section 103 of the Internal Revenue Code.  However, the bonds are not actually tax exempt; thus any interest paid bondholders is taxable. BABs must also comply with the arbitrage rules in section 148 of the code.

The Recovery Act of 2009 established three categories of stimulus bonds: Direct Payment, Tax Credit, or Recovery Zone Economic Development. Direct Payment BABs require the bond issuer to file IRS Form 8038-CP with the IRS in order to receive a subsidy of 35% of the interest paid.  Tax Credit BABs return a tax credit to the bond holder.

Recovery Zone Bonds (RZEDBs) apply to bonds in large municipalities with populations of 100,000 or more with significant levels of poverty, unemployment, foreclosure rates, general distress, empowerment zones or military closure. With (RZEDBs) the government pays 45% of the interest owed directly to the bondholders .

All three types of eligible bonds must have been issued before the expiry date of December 31st 2010. However, it is possible that the program may be reinstated, although some changes, including to the subsidy rates, are likely.