4.11 Bank Qualified Bonds

Generally, a bank may not deduct any of the carrying cost of tax exempt bonds, effectively eliminating the benefit of investing in tax exempt bonds. A bank may, however, deduct a portion of the interest on a “qualified tax exempt obligation” (generally referred to as “bank qualified bonds”). Thus, bank qualified bonds are attractive investments for banks and can generally be sold with lower interest rates than similar bonds that are not bank qualified bonds.

For a bond to be a bank qualified bond, the issuer cannot reasonably anticipate, when the bond is issued, to issue more than $10 million in tax exempt bonds in that calendar year (excluding certain refunding bonds), the bond cannot be a private activity bond (other than a qualified 501(c)(3) bond), and the issuer must designate the bond as a bank qualified bond (which is generally done in the disclosure document and in the tax certificate relating to the bond).