Please note: The Tax Cuts and Jobs Act (HR 1) of 2017 discontinued tax credit bonds from January 1, 2018. Issuers of Qualified Energy Conservation Bonds (QECBs) who opted for direct Treasury payments before December 31, 2017, will continue receiving these as per the Internal Revenue Code (Section 54D). The following summary is provided for historical reference.
The Energy Improvement and Extension Act of 2008, passed in October 2008, initiated the issuance of QECBs. These bonds, utilized by state, local, and tribal governments, finance various energy projects. Similar to new Clean Renewable Energy Bonds (CREBs), QECBs are tax credit bonds. Initially, the legislation in 2008 capped the issuance of these bonds at $800 million. This cap was increased to $3.2 billion by the American Recovery and Reinvestment Act of 2009. The IRS released interim guidelines in April 2009 (Notice 2009-29) on the program’s operation and bond allocation. Further, in March 2010, H.R. 2847 was passed, allowing bond issuers to receive a direct subsidy from the Treasury Department to cover part of the interest on these bonds, as detailed in IRS Notice 2010-35.
In tax credit bonds, the issuer repays only the principal, while bondholders receive federal tax credits as interest. These credits, set daily by the Treasury Department, can be used to offset the bondholder’s tax liabilities, although they receive only 70% of the Treasury rate. Unused credits can be carried forward but not refunded. Unlike traditional tax-exempt bonds, these tax credits are taxable income for the bondholder.
For QECBs issued after March 18, 2010, issuers can choose to receive a direct Treasury payment equivalent to the non-refundable tax credit, replacing the tax credit to the bondholder. This option, initially for Build America Bonds, effectively reduces the interest rate for the issuer due to government subsidies.
QECBs differ from CREBs in that they don’t require a Treasury application process. Allocation is based on state population percentages as of July 1, 2008, with a portion designated for large local governments (populations of 100,000 or more). These governments can reallocate their shares back to the state. The IRS Notice 2009-29 lists QECB allocations per state and territory.
“Qualified energy conservation projects” include a wide range of initiatives, such as energy-efficient public building upgrades, green community programs, renewable energy production, and public energy efficiency education. The IRS clarified these terms and requirements in July 2012 (Notice 2012-44). Facilities eligible for CREBs are also eligible for QECBs.
