Federal tax legislation enacted in 1997 (Section 226 of H.R. 2014 The Taxpayer Relief Act of 1997, Section 1397E of the Internal Revenue Code) allows for certain schools, known as Education Zone Academies, to finance the equipping and/or renovating of school facilities at a nominal interest rate (as low as zero percent) through the allocation of tax credits.
An Education Zone Academy that qualifies under the program is any public school:
- Under a local education agency (LEA) located in an Enterprise Zone or an Empowerment Community or where there is a reasonable expectation that at least 35 percent of the students at the school site at the time of the bonding will be eligible for free or reduced-cost lunches under the federal school lunch program, and,
- That has entered into a public-private partnership whereby the curriculum is designed in cooperation with business to enhance the academic curriculum, increase graduation and employment rates, and prepare students for college and the workforce, and,
- Where the school site receives contributions from the private entity(ies) in the form of:
- Goods, including equipment and technology
- Services, including help developing curriculum or using technology, and internships or field trips that provide opportunities for students to learn outside a traditional classroom setting
Commitments of private business support must equal ten percent of the proceeds of the bonds allocated the tax credit under the bond program. Regular tax rules concerning donations apply. The business must provide a written commitment to the school.
How Does It Work?
The eligibility criteria are applied on a school-by-school basis, not district-wide. The students in the school must be subject to the same academic standards as other students in the district.
The local school district or a state or local governmental agency issues the bonds. A financial institution, bank, insurance company, or corporation in the business of lending money will purchase the Qualified Zone Academy bond (QZAB). The QZAB is a taxable bond. Lenders may require that a bond counsel verify that the transaction meets the criteria of a QZAB. In lieu of interest payments from the school district, the lender receives a tax credit against its annual tax liability to the federal government.
Ninety-five percent (95%) of the bond proceeds are to be used for renovation, repair, and rehabilitation of facilities; instructional materials and equipment; or teacher professional development. The district must prepare a written spending plan, specifying how these proceeds are to be used.
The QZAB is a loan that must be repaid within a specified time. The rate of the tax credit and the maximum term of the bond are determined by the Treasury Department for each particular month the bonds were issued for such month. The tax credit mechanism eliminates the cost of interest only, not the bond principal.
Who May Apply?
A single district or a coalition of districts may apply. District partnerships may be formed so long as the contribution of business(es) is no less than ten percent of the bond's value to the school site, with a specific curriculum, and the QZAB plan is approved by each school district.
Where Do I Get More Information?
Financial questions, such as "What is the credit rate?", "What is the maximum term?", and "What is the tax credit?" should be thoroughly understood by the district's chief business official. The Department of the Treasury issued a document, 26 CFR Part 1 [TD 8755] RIN 1545-AV74, published in the January 7, 1998, Federal Register which should be read and thoroughly understood. (See Appendix B.)
The U.S. Department of Education in April 1998 issued a "Guidance." (See Appendix C.)