Industrial revenue bonds (small issue bonds)

Industrial revenue bonds (IRBs, also called industrial development bonds) are a kind of "private activity bond." A state or local government issuer, such as an industrial development authority, sells bonds to investors and lends the proceeds to your business. You repay the issuer, which pays the bondholders. Because bondholders do not pay federal income tax on the interest, they accept a lower rate than on a taxable loan, and that saving is the point of the bond.

For a business, the federal tax law allows these as qualified small issue bonds, and since 1986 only for manufacturing facilities (and for land for first-time farmers). The main rules, in section 144(a) of the Internal Revenue Code and the IRS's guide for issuers and borrowers:

• What it can pay for: at least 95% of the money must go on land or depreciable property, such as a building or equipment, for a facility used to make or process goods. Up to a quarter can go on related facilities on the same site. Less than 25% can go on land, and generally none on buying existing buildings or equipment that someone has already used, unless enough is spent rehabilitating them.
• How much: up to $1 million an issue, or up to $10 million if the issuer elects to count your other capital spending on facilities in the same city or county over six years (three before and three after). Each business can have at most $40 million of these and similar bonds outstanding.
• Not for: facilities mainly for retail food and drink, car sales or service, or recreation or entertainment (more than 25% of the money), or any golf course, country club, massage parlor, tennis club, skating facility, racquet sports facility, hot tub facility, suntan facility or racetrack.
• State limits: small issue bonds count against each state's yearly "volume cap" on private activity bonds, which the state shares out among its issuers under its own rules, so there may be a wait or a competition for an allocation.
• Public approval: before the bonds are issued, an elected official or body must approve them after a public hearing with reasonable notice, or by a vote.
• Costs and term: issuance costs paid from the bond money are capped at 2% of it, and the bonds' average maturity can be no more than 120% of the expected life of what they pay for.

The bonds are sold to investors or placed with a bank, and the business usually pays the issuer's fees and the bond lawyers. The tax exemption depends on the rules being kept for as long as the bonds are outstanding.