US House Bill would eliminate tax-exempt 501(c)(3) bonds

We are writing to alert you to a serious threat to your continued ability to finance capital assets with tax-exempt bonds.

Today the House Ways and Means Committee released H.R. 1, titled the “Tax Cuts and Jobs Act” (hereinafter the “House Bill”), which is intended to achieve sweeping tax reform. Along with its myriad provisions affecting tax rates, deductions and credits, the House Bill would dramatically affect the issuance of tax-exempt bonds that benefit 501(c)(3) hospital and other healthcare organizations.

What healthcare organizations need to know

The House Bill would eliminate the ability to issue all categories of tax-exempt “private activity bonds” on and after January 1, 2018. Private activity bonds include “qualified 501(c)(3) bonds,” which include the tax-exempt bonds that benefit 501(c)(3) hospital and other healthcare organizations. Although qualified 501(c)(3) bonds have long been distinguished by many in the industry from “traditional” private activity bonds that benefit for-profit enterprises (e.g., no volume cap, not subject to the alternative minimum tax), the drafters of the House Bill drew no such distinction and simply targeted the entire private activity bond category. The law change would affect both new money and refunding bonds. Without the benefit of tax exemption for qualified 501(c)(3) bonds, 501(c)(3) hospital and healthcare organizations could finance or refinance their capital requirements only through the issuance of taxable debt, increasing their cost of capital.

The House Bill also eliminates the ability of any issuer to advance refund tax-exempt bonds. This change, too, would apply to bonds issued on and after January 1, 2018. If tax-exempt qualified 501(c)(3) bonds are eliminated, the prohibition on advance refundings may not have a further impact on 501(c)(3) hospital and healthcare organizations. However, if in the course of Congressional negotiations, the ability to issue tax-exempt qualified 501(c)(3) bonds is preserved, it is possible that the prohibition on advance refunding bonds will remain intact. Eliminating advance refundings of tax-exempt bonds would prohibit 501(c)(3) hospital and healthcare organizations from taking advantage of refunding savings until their bonds are currently callable, usually 10 years after the date of issuance in the case of fixed rate bonds.

The House Bill may also have other effects on your organization, positive or negative.

Our Public Finance and Tax lawyers are continuing to monitor the status of the House Bill as it progresses, as well as other legislation, including the Senate’s version of a tax bill. We understand informally that the Senate Finance Committee is scheduled to introduce its bill sometime next week.

You may want to reach out to one or more healthcare industry associations, such as the AHA, and also to your Congressional representatives, to express your views on the proposed elimination of the ability to issue tax-exempt qualified 501(c)(3) bonds and advance refunding bonds going forward.

Feel free to contact us regarding ongoing developments.

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