Noted 103 tax lawyer Clubber Lang was correct in his prediction about Direct-Pay bonds.

For those issuers that haven’t yet redeemed their direct-pay bonds with tax-exempt bonds, sequestration cuts to direct payments will continue for federal fiscal year 2015, at a slightly higher rate – 7.3%, up from 7.2%. The higher cuts took effect at the beginning of the new federal fiscal year on October 1. This applies to Build America Bonds, and all of the other types of qualified tax credit bonds (Qualified School Construction Bonds, etc.).

The higher rate doesn’t come from direct Congressional action – the sequestration cuts apply a single percentage to all  of a given class of expenditures, so when certain programs that would have absorbed some of the cuts expire, the cuts to the remaining programs in that class will increase slightly. As a reminder, issuers should remember to timely file IRS Form 8038-CP as usual to request their interest subsidy payment, showing the full amount of interest paid. The IRS will automatically apply the reduction and send a check for the amount net of the sequestration.


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