Conduit debt is a bond marketed by public entities such as states, counties and cities on behalf of a private entity. Common issuers of conduit debt include businesses, hospitals and educational institutions. The public entity does not have any obligation to repay--the debt is assumed by the private issuer.
Tax Treatment
Normally, conduit obligation bonds are taxed like municipal bonds: Interest received on these bonds is free of federal income tax. This makes them attractive to investors in higher tax brackets.
Alternative Minimum Tax Brackets
However, certain conduit debt issues, known as private activity bonds, are subject to federal income taxation under alternative minimum tax rules,. Investors with very high incomes might have to calculate interest received from these bonds and pay a tax of up to 28 percent.
Private Activity Bond
IRS Publication 4078 governs the tax treatment of private activity bonds.
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