Private Business Tests & Private Loan Financing Test
The IRS provides several tests to determine whether or not a bond is considered a private activity bond. If the bond meets both of the private business tests, or if it passes the private loan financing test, then it is a private activity bond.
The two private business tests are the private business use test and the private security or payment test.
- • Private business use test—greater than 10% of bond proceeds are used to fund a nongovernmental entity
- • Private security or payment test—greater than 10% of the debt service for a bond is paid for or secured by a property used by a private business
If both of these two tests are passed, then the bond is a private activity bond.
Example: Goodville issues $10,000,000 in bonds. A total of $1.1 million of that is used to help a private business build a parking garage. The proceeds from the parking garage are then used to pay part of the interest and principal of the bonds. By the time the bonds mature, the parking ga