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 an