Definition of the Qualified Tax Credit Rate (QTCR)
The qualified tax credit rate describes the tax credit amount of a bond issue. It is the percentage of each dollar of tax credit refundable to the issuer. The QTCR is set daily by the U.S. Treasury.
The QTCR is determined when the bond issue is rated and cannot change during the life of the bond issue. The QTCR must be equal to or less than 70% for most issuers but may be up to 100% if the issuer can claim either of the following:
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A Postal Authority (as defined in section 301(4) of title 39, United States Code (39 U.S.C. Section 301(4))) that qualifies as a state or local government for the purpose of issuing tax-exempt bonds; or
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An organization created principally to provide solid waste management services if at least 80 percent of the organization's activities consist of providing those services to entities other than unrelated persons
How to Determine the Qualified Tax Credit Rate (QTCR)
The QTCR can be determined by finding the difference between two amounts:
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The net present value of the interest payments
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The net present value of refundable income and other tax credit amounts (i.e., the tax credits not needed to offset or reduce a bondholder's tax liability)
The QTCR is then determined by comparing this difference to the present value of the total payments made on the bond issue.
Purpose and Uses of the Qualified Tax Credit Rate (QTCR)
The qualified tax credit rate (QTCR):
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Determines if a bond issue is taxable or tax-exempt and calculates the taxable interest payments made on each payment date.
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Calculates if specific limits for qualified private activity bonds have been reached.
For example, state or local government issuers can issue tax-exempt bonds for up to 100% of the QTCR, but after reaching that limit, issuers must begin issuing taxable bonds.
Also, the federal limitation on outstanding qualified private activity means bond volume depends upon the QTCR.
Qualified Tax Credit Bonds
Qualified tax credit bonds allow credit to investors that hold such bonds on one or more of the quarterly credit allowance dates under section 54A.
QTCBs include qualified school construction bonds, qualified zone academy bonds, qualified energy conservation bonds, and new clean renewable energy bonds.
Qualified School Construction Bonds (QSCBs)
QSCBs finance, refinance, or reimburse qualified school construction expenditures of certain state and local governments.
Proceeds should be spent for a facility within the jurisdiction of the issuer, which is either a state or local government within the jurisdiction of which the public school facility is located.
An issuer can issue tax-exempt QSCBs for up to 100% of the qualified tax credit rate (QTCR), but after reaching that limit, issuers must begin issuing taxable bonds.
Qualified Energy Conservation Bonds (QECBs)
QECBs finance energy conservation projects for public and private-owned utilities and nonprofit entities, such as hospitals and universities. Like QSCBs, the amount an issuer can issue in QECBs is also limited by the QTCR.
QECBs may be issued by a state or local government, including Indian tribal governments.
New Clean Renewable Energy Bonds (New CREBs)
A new type of tax credit bond created by the Energy Improvement and Extension Act of 2008 for financing "qualified renewable energy facilities" authorized under IRC Section 54A.
A qualified renewable energy facility is a wind facility, closed-loop biomass facility, open-loop biomass facility, geothermal energy facility, or small irrigation power facility.
New CREBs must comply with the requirements of IRC Section 54C.
Qualified Zone Academy Bonds (QZABs)
QZABs provide funds for establishing, maintaining, and operating a "qualified zone academy".
A qualified zone academy is an eligible public school that serves low-income students. It is located in an empowerment zone or enterprise community or has characteristics qualifying it as a "school in need of improvement".
These bonds cannot be used for new construction and may be issued by a state or local government located within the jurisdiction of a qualified zone academy.
Specified Tax Credit Bonds
Specified tax credit bonds are:
For more information on specified tax credit bonds, visit TreasuryDirect’s qualified tax credit bond rates webpage.
The issuer applies the (1) maximum maturity, (2) applicable credit rate, and (3) permitted sinking fund yield. On the first day, there is a binding written contract, generally when the bond purchase agreement is signed.
The Bottom Line
The qualified tax credit rate (QTCR) is an important number for several reasons, including determining whether or not a bond issue is taxable or tax-exempt and calculating the taxable interest payments made on the payment date.
As such, it remains crucial to understand how to calculate the QTCR so that you can determine if certain federal limitations have been met.
The QTCR can be a primary aspect of different tax issues, so do your research and seek the proper guidance if necessary.
FAQs
1. Do qualified bond credit rates take into account inflation?
No. When determining the QTCR for a taxable issue, the QTCR only applies to the face value of the issue.
2. If an issuer is not a "qualified issuer" are their bond issues still considered a qualified tax credit rate?
No. When determining the QTCR for a taxable issue, it must be determined by whether or not the issuer qualifies as a "qualified issuer".
3. Is there such a thing as a qualified school construction bond credit rate?
Yes. The QSCB is defined in Section 54(a) of the IRC and includes requirements for issuers, proceeds, uses, and so on. A QSCB has the same QTCR as any other qualified tax credit rate.
4. Can qualified tax credit bonds finance energy conservation projects?
Yes. QECBs were introduced by the American Recovery and Reinvestment Act of 2009 (ARRA) on February 17, 2009, in Section 142 of the IRC. A QECB has the same QTCR as any other qualified tax credit rate.
