Sequestration and Subsidy Payments

March 5, 2013

SequesterMarch 2013:

Today the Internal Revenue Service released an announcement on its Web site concerning the effect of sequestration on certain state and local government filers of Form 8038-CP.  The announcement recounts that, beginning March 1, 2013, certain automatic reductions have taken place as required by the fiscal cliff legislation adopted at the end of 2012.

The reductions include reductions to refundable credits under I.R.C. 6431 with respect to certain qualified bonds.  The sequester reduction is applied to I.R.C. 6431 amounts claimed by an issuer on any Form 8038-CP filed with the Service which results in a payment to such issuer on or after Mach 1, 2013.  The sequestration reduction rate will be applied until the end of the fiscal year or until Congress intervenes.

The reductions apply to build America bonds, Qualified School Construction Bonds, Qualified Zone Academy Bonds, New Clean Renewable Energy Bonds and Qualified Energy Conservation Bonds for which the issuer elected to receive a direct credit subsidy pursuant to I.R.C. 6431.

As determined by the Office of Management and Budget, payments to issuers from the budget accounts associated to these qualified bonds are subject to a reduction of 8.7% of the amount budgeted for such payments.

Issuers are requested to complete the Form 8038-CP in the same manner as prior to the sequestration.  The IRS states that it will notify issuers that a portion of the requested payment is subject to the sequester reduction.

It is not clear whether the 8.7% is applied against the 35% subsidy percentage (resulting in a reduced subsidy percentage of 31.955% = 35% reduced by 8.7%) or against the actual dollar amount of the subsidy payment at 35% (assuming a $100 subsidy payment at 35%, the reduction would be $8.70; i.e., 35% – 8.7% = 26.3%).

October 2013:

On October 1, 2013, the Internal Revenue Service announced that the sequestration rate for fiscal year 2014, beginning October 1, 2013, and ending September 30, 2014, will be 7.2%, unless Congress changes the sequestration laws.  This compares to the 8.7% in effect from March 1, 2013 through September 30, 2013.

October 2014:

Payments processed on or after October 1, 2014, and on or before September 31, 2015, are subject to a reduction of 7.3%.  It does not matter when the Form 8038-CP to claim the credit is filed.  The reduction will be based on when the payment form is processed.  Sequestration may continue through federal fiscal year 2024 unless action is taken to change or end sequestration.

Fiscal Year 2016:

“Pursuant to the requirements of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, refund payments to certain state and local government filers claiming refundable credits under section 6431 of the Internal Revenue Code applicable to certain qualified bonds are subject to sequestration. This means that refund payments processed on or after October 1, 2015 and on or before September 30, 2016 will be reduced by the fiscal year 2016 sequestration rate of 6.8 percent, irrespective of when the amounts claimed by an issuer on any Form 8038-CP was filed with the IRS. The sequestration reduction rate will be applied unless and until a law is enacted that cancels or otherwise impacts the sequester, at which time the sequestration reduction rate is subject to change.”  See IRS.gov.

Fiscal Year 2017:

The sequestration rate during fiscal year 2017, starting October 1, 2016 and ending September 30, 2017, was 6.9%.

Fiscal Year 2017:

The sequestration rate during fiscal year 2018, starting October 1, 2017 and ending September 30, 2018, was 6.6%.  This represents nearly a 2% reduction in the sequestration rate since 2013.  See the Treasury Department announcement here.

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