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Industrial Revenue Bonds offer manufacturers low-cost financing

By John Sassaris, Commercial Group President

May 4, 2016

Industrial Revenue Bonds (IRBs) are an often overlooked but excellent financing option for small and medium-size companies looking to grow or expand their operations. IRBs provide tax-exempt, long-term financing at rates that can be significantly lower than conventional financing, including construction and business loans.

Here are answers to some commonly asked questions about IRBs.

What are the benefits of IRBs?

The principal benefit of an IRB is its tax-exempt status. Companies can save as much as 22 percent in interest-rate costs, because interest on these bonds is exempt from federal income taxes.

IRBs also are available with fixed or variable-rate financing and are the most cost effective with issues of $2 million or more. Projects below $1.5 million may not be cost effective given the issuance and closing costs involved.

What kinds of companies and projects qualify for these bonds?

IRBs are available to manufacturing companies that make or process tangible products. The financing can be used for the purchase of new manufacturing equipment, construction of a new facility, expansion of an existing facility, or the acquisition of another company’s facility.

IRBs’ term varies from five to 30 years, depending on the life of the assets; however, the bank amortization rate may be limited to 25 years.

There are other parameters, too. The bond’s maximum size is $10 million, and 75% of the proceeds must be used for core manufacturing activities. Companies must have no more than $20 million in capital expenditures for the project for three years prior and three years after bond closing. They also must have no more than $40 million in outstanding tax-exempt debt anywhere in the United States.

What about companies that want to borrow more than $10 million, or those that produce intangible products — can they get an IRB?

The manufacturing description and tax code currently regulating IRBs was established in 1986. Much has changed in the business world during the last 30 years, including the emergence of new industries and rising costs for construction and new manufacturing equipment. For these reasons, new tax reform is being proposed in Washington, D.C., that would accommodate current business conditions and extend the benefits of IRBs to more companies.

Legislation now before Congress would modernize IRBs, increasing the dollar amount available to borrowers while maintaining the tax-exempt status. It also calls for the inclusion of companies that produce intangible items, such as high-tech services, energy or biotech products. The definition of manufacturers could expand as well to include the production of software, patents, copyrights, formulas, processes, designs, patterns, and similar intellectual property.

Industrial Revenue Bonds are one of several low-cost financing options available to manufacturers that qualify. An experienced lender is a great source of detailed information about this option and others, including New Markets Tax Credits.

Disclaimer: The information contained within this report has been obtained from sources deemed to be reliable; however, we do not guarantee its accuracy. You should make your own independent evaluation of the relevance and adequacy of the information contained in this material and make such other investigations as you deem necessary, including obtaining legal, financial and/or tax advice.

IRS Circular 230 Disclosure: To the extent that this document or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Back to top