A Tax-Exempt Bond Primer for 501(c)(3) Organizations

Johnny Hutchinson

Johnny devotes his practice to tax-exempt bonds, including 501(c)(3) bond financings. He handles tax issues arising before and after a tax-exempt bond deal closes. Johnny writes for Squire Patton Boggs’s Public Finance Tax blog and is the chairman of the Tax Law Committee of the National Association of Bond Lawyers.

Any maturing 501(c)(3) organization will at some point have to decide whether to borrow in the tax-exempt market to finance the capital projects that will promote its mission. Although tax-exempt debt usually carries a lower interest rate than taxable debt, it also brings with it additional costs, in the form of various legal restrictions on how you can use the project and the rather unpleasant experience of having to deal with tax lawyers.

This article is aimed at 501(c)(3) organizations that have not borrowed in the tax-exempt debt market before, to prepare you for the federal tax aspects of your first deal. However, for our readers who are seasoned veterans of the tax-exempt borrowing process, before you close the browser window or turn the page, remember the admonition of the great muni bond tax lawyer Vince Lombardi— "Excellence is achieved by mastery of the fundamentals." Stick around—you, too, might find something useful here.