Title 26 — Internal Revenue CodeRelease 119-73
§1394 Tax-exempt enterprise zone facility bonds
Title 26 › Subtitle Subtitle A— - Income Taxes › Chapter CHAPTER 1— - NORMAL TAXES AND SURTAXES › Subchapter Subchapter U— - Designation and Treatment of Empowerment Zones, Enterprise Communities, and Rural Development Investment Areas › Part PART II— - TAX-EXEMPT FACILITY BONDS FOR EMPOWERMENT ZONES AND ENTERPRISE COMMUNITIES › § 1394
Summary
Treat a bond as a tax-free facility bond if 95% or more of the money from the bond is used to pay for an "enterprise zone facility." An enterprise zone facility means qualified zone property mainly used by an enterprise zone business, plus nearby land needed for that property. Qualified zone property follows the usual zone rules but with two changes: include enterprise communities along with empowerment zones, and use 15 percent of the adjusted basis test. An enterprise zone business follows the normal zone-business rules with changes that count enterprise communities, let employees who live in empowerment zones, enterprise communities, or qualified low‑income communities qualify as zone residents, allow a startup period and a three‑year testing period, and offer a 35% employee‑residency safe harbor for later years. A qualified low‑income community is a census tract with at least a 20% poverty rate or median family income at or below 80% of the state (85% in certain high‑migration rural counties); Treasury can treat targeted groups as qualified low‑income communities. There are limits and relief rules. No one person may have more than $3,000,000 in outstanding zone facility bonds for any one zone or $20,000,000 for all zones combined. The usual private‑activity rules do not apply to special "empowerment zone facility bonds" if the nominating local government formally designates them. Those designations have caps of $60,000,000 for rural zones, $130,000,000 for urban zones under 100,000 people, and $230,000,000 for urban zones of 100,000 or more. Refunding bonds can keep their designation if the refunding amount does not exceed the refunded amount and the old bond is redeemed within 90 days. If issuers or main users tried in good faith to meet the rules and fix mistakes quickly, the issue can still qualify. Interest deduction is disallowed from the start of the calendar year in which the facility stops being used in the zone or the main user stops being an enterprise zone business, but that rule does not apply just because a zone designation ended or because of bankruptcy. For which empowerment zones count, different rules apply to bonds issued before January 1, 2002 and those issued after December 31, 2001.
Full Legal Text
Title 26, §1394
Internal Revenue Code — Source: USLM XML via OLRC
(a)For purposes of part IV of subchapter B of this chapter (relating to tax exemption requirements for State and local bonds), the term “exempt facility bond” includes any bond issued as part of an issue 95 percent or more of the net proceeds (as defined in section 150(a)(3)) of which are to be used to provide any enterprise zone facility.
(b)For purposes of this section—
(1)The term “enterprise zone facility” means any qualified zone property the principal user of which is an enterprise zone business, and any land which is functionally related and subordinate to such property.
(2)The term “qualified zone property” has the meaning given such term by section 1397D; except that—
(A)the references to empowerment zones shall be treated as including references to enterprise communities, and
(B)section 1397D(a)(2) shall be applied by substituting “an amount equal to 15 percent of the adjusted basis” for “an amount equal to the adjusted basis”.
(3)(A)Except as modified in this paragraph, the term “enterprise zone business” has the meaning given such term by section 1397C.
(B)In applying section 1397C for purposes of this section—
(i)(I)Except as provided in subclause (II), references in section 1397C to empowerment zones shall be treated as including references to enterprise communities.
(II)For purposes of subsections (b)(6) and (c)(5) of section 1397C, an employee shall be treated as a resident of an empowerment zone if such employee is a resident of an empowerment zone, an enterprise community, or a qualified low-income community within an applicable nominating jurisdiction.
(ii)A business shall not fail to be treated as an enterprise zone business during the startup period if—
(I)as of the beginning of the startup period, it is reasonably expected that such business will be an enterprise zone business (as defined in section 1397C as modified by this paragraph) at the end of such period, and
(II)such business makes bona fide efforts to be such a business.
(iii)A business shall not fail to be treated as an enterprise zone business for any taxable year beginning after the testing period by reason of failing to meet any requirement of subsection (b) or (c) of section 1397C if at least 35 percent of the employees of such business for such year are residents of an empowerment zone, an enterprise community, or a qualified low-income community within an applicable nominating jurisdiction. The preceding sentence shall not apply to any business which is not a qualified business by reason of paragraph (1), (4), or (5) of section 1397C(d).
(C)For purposes of subparagraph (B)—
(i)The term “qualified low-income community” means any population census tract if—
(I)the poverty rate for such tract is at least 20 percent, or
(II)the median family income for such tract does not exceed 80 percent of statewide median family income (or, in the case of a tract located within a metropolitan area, metropolitan area median family income if greater).
(ii)The Secretary shall prescribe regulations under which 1 or more targeted populations (within the meaning of section 103(20) of the Riegle Community Development and Regulatory Improvement Act of 1994) may be treated as qualified low-income communities.
(iii)In the case of an area which is not tracted for population census tracts, the equivalent county divisions (as defined by the Bureau of the Census for purposes of defining poverty areas) shall be used for purposes of determining poverty rates and median family income.
(iv)(I)In the case of a population census tract located within a high migration rural county, clause (i)(II) shall be applied to areas not located within a metropolitan area by substituting “85 percent” for “80 percent”.
(II)For purposes of this clause, the term “high migration rural county” means any county which, during the 20-year period ending with the year in which the most recent census was conducted, has a net out-migration of inhabitants from the county of at least 10 percent of the population of the county at the beginning of such period.
(D)For purposes of subparagraph (B)—
(i)The term “startup period” means, with respect to any property being provided for any business, the period before the first taxable year beginning more than 2 years after the later of—
(I)the date of issuance of the issue providing such property, or
(II)the date such property is first placed in service after such issuance (or, if earlier, the date which is 3 years after the date described in subclause (I)).
(ii)The term “testing period” means the first 3 taxable years beginning after the startup period.
(iii)The term “applicable nominating jurisdiction” means, with respect to any empowerment zone or enterprise community, any local government that nominated such community for designation under section 1391.
(E)The term “enterprise zone business” includes any trades or businesses which would qualify as an enterprise zone business (determined after the modifications of subparagraph (B)) if such trades or businesses were separately incorporated.
(c)(1)Subsection (a) shall not apply to any issue if the aggregate amount of outstanding enterprise zone facility bonds allocable to any person (taking into account such issue) exceeds—
(A)$3,000,000 with respect to any 1 empowerment zone or enterprise community, or
(B)$20,000,000 with respect to all empowerment zones and enterprise communities.
(2)For purposes of paragraph (1), the aggregate amount of outstanding enterprise zone facility bonds allocable to any person shall be determined under rules similar to the rules of section 144(a)(10), taking into account only bonds to which subsection (a) applies.
(d)The requirements of section 147(c)(1)(A) and 147(d) shall not apply to any bond described in subsection (a).
(e)(1)An issue which fails to meet 1 or more of the requirements of subsections (a) and (b) shall be treated as meeting such requirements if—
(A)the issuer and any principal user in good faith attempted to meet such requirements, and
(B)any failure to meet such requirements is corrected within a reasonable period after such failure is first discovered.
(2)No deduction shall be allowed under this chapter for interest on any financing provided from any bond to which subsection (a) applies with respect to any facility to the extent such interest accrues during the period beginning on the first day of the calendar year which includes the date on which—
(A)substantially all of the facility with respect to which the financing was provided ceases to be used in an empowerment zone or enterprise community, or
(B)the principal user of such facility ceases to be an enterprise zone business (as defined in subsection (b)).
(3)Paragraphs (1) and (2) shall not apply solely by reason of the termination or revocation of a designation as an empowerment zone or an enterprise community.
(4)Paragraphs (1) and (2) shall not apply to any cessation resulting from bankruptcy.
(f)(1)In the case of an empowerment zone facility bond—
(A)such bond shall not be treated as a private activity bond for purposes of section 146, and
(B)subsection (c) of this section shall not apply.
(2)(A)Paragraph (1) shall apply to an empowerment zone facility bond only if such bond is designated for purposes of this subsection by the local government which nominated the area to which such bond relates.
(B)The aggregate face amount of bonds which may be designated under subparagraph (A) with respect to any empowerment zone shall not exceed—
(i)$60,000,000 if such zone is in a rural area,
(ii)$130,000,000 if such zone is in an urban area and the zone has a population of less than 100,000, and
(iii)$230,000,000 if such zone is in an urban area and the zone has a population of at least 100,000.
(C)(i)Bonds to which paragraph (1) applies shall not be taken into account in applying the limitation of subsection (c) to other bonds.
(ii)In the case of a refunding (or series of refundings) of a bond designated under this paragraph, the refunding obligation shall be treated as designated under this paragraph (and shall not be taken into account in applying subparagraph (B)) if—
(I)the amount of the refunding bond does not exceed the outstanding amount of the refunded bond, and
(II)the refunded bond is redeemed not later than 90 days after the date of issuance of the refunding bond.
(3)For purposes of this subsection, the term “empowerment zone facility bond” means any bond which would be described in subsection (a) if—
(A)in the case of obligations issued before January 1, 2002, only empowerment zones designated under section 1391(g) were taken into account under section 1397C and 1397D, and
(B)in the case of obligations issued after December 31, 2001, all empowerment zones (other than the District of Columbia Enterprise Zone) were taken into account under section 1397C and 1397D.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
References in Text
section 103(20) of the Riegle Community Development and Regulatory Improvement Act of 1994, referred to in subsec. (b)(3)(C)(ii), is classified to section 4702(20) of Title 12, Banks and Banking.
Prior Provisions
A prior section 1394, added Pub. L. 95–600, title VI, § 601(a), Nov. 6, 1978, 92 Stat. 2895; amended Pub. L. 96–595, § 3(a)(6)–(8), Dec. 24, 1980, 94 Stat. 3465, related to rules applicable to distributions of an electing general stock ownership corporation, prior to repeal by Pub. L. 99–514, title XIII, § 1303(a), Oct. 22, 1986, 100 Stat. 2658. A prior section 1395, added Pub. L. 95–600, title VI, § 601(a), Nov. 6, 1978, 92 Stat. 2895, related to adjustment to basis of stock of shareholders, prior to repeal by Pub. L. 99–514, title XIII, § 1303(a), Oct. 22, 1986, 100 Stat. 2658.
Amendments
2018—Subsec. (b)(3)(B)(i)(II). Pub. L. 115–141 substituted “subsections” for “subsection”. 2015—Subsec. (b)(3)(B)(i). Pub. L. 114–113, § 171(b), designated existing provisions as subcl. (I), inserted heading, substituted “Except as provided in subclause (II), references” for “References”, and added subcl. (II). Subsec. (b)(3)(B)(iii). Pub. L. 114–113, § 171(d)(1), substituted “, an enterprise community, or a qualified low-income community within an applicable nominating jurisdiction” for “or an enterprise community”. Subsec. (b)(3)(C). Pub. L. 114–113, § 171(c)(1), added subpar. (C). Former subpar. (C) redesignated (D). Subsec. (b)(3)(D). Pub. L. 114–113, § 171(c)(1), (d)(2), redesignated subpar. (C) as (D) and substituted “Other definitions” for “Definitions” in heading. Former subpar. (D) redesignated (E). Subsec. (b)(3)(D)(iii). Pub. L. 114–113, § 171(c)(2), added cl. (iii). Subsec. (b)(3)(E). Pub. L. 114–113, § 171(c)(1), redesignated subpar. (D) as (E). 2014—Subsec. (f). Pub. L. 113–295, § 220(o), struck out “designated under section 1391(g)” after “empowerment zones” in heading. Subsec. (f)(1), (2)(A). Pub. L. 113–295, § 220(p), substituted “an empowerment zone facility bond” for “a new empowerment zone facility bond”. 2002—Subsec. (c)(2). Pub. L. 107–147 substituted “paragraph (1)” for “subparagraph (A)”. 2000—Subsec. (b)(2). Pub. L. 106–554, § 1(a)(7) [title I, § 116(b)(3)(A)], substituted “section 1397D” for “section 1397C” in introductory provisions. Subsec. (b)(2)(B). Pub. L. 106–554, § 1(a)(7) [title I, § 116(b)(3)(B)], substituted “section 1397D(a)(2)” for “section 1397C(a)(2)”. Subsec. (b)(3). Pub. L. 106–554, § 1(a)(7) [title I, § 116(b)(4)(A)], substituted “section 1397C” for “section 1397B” wherever appearing. Subsec. (b)(3)(B)(iii). Pub. L. 106–554, § 1(a)(7) [title I, § 116(b)(4)(B)], substituted “section 1397C(d)” for “section 1397B(d)”. Subsec. (f)(3). Pub. L. 106–554, § 1(a)(7) [title I, § 115(a)], amended heading and text of par. (3) generally. Prior to amendment, text read as follows: “For purposes of this subsection, the term ‘new empowerment zone facility bond’ means any bond which would be described in subsection (a) if only empowerment zones designated under section 1391(g) were taken into account under section 1397B and 1397C.” 1997—Subsec. (b)(2). Pub. L. 105–34, § 955(b), amended heading and text of par. (2) generally. Prior to amendment, text read as follows: “The term ‘qualified zone property’ has the meaning given such term by section 1397C; except that the references to empowerment zones shall be treated as including references to enterprise communities.” Subsec. (b)(3). Pub. L. 105–34, § 955(b), amended heading and text of par. (3) generally. Prior to amendment, text read as follows: “The term ‘enterprise zone business’ has the meaning given to such term by section 1397B, except that— “(A) references to empowerment zones shall be treated as including references to enterprise communities, and “(B) such term includes any trades or businesses which would qualify as an enterprise zone business (determined after the modification of subparagraph (A)) if such trades or businesses were separately incorporated.” Subsec. (f). Pub. L. 105–34, § 953(a), added subsec. (f). 1996—Subsec. (e)(2). Pub. L. 104–188, which directed that par. (2) be amended by striking “(i)” and inserting “(A)” and by striking “(ii)” and inserting “(B)”, could not be executed, because par. (2) contained neither “(i)” nor “(ii)”.
Statutory Notes and Related Subsidiaries
Effective Date
of 2015 Amendment Pub. L. 114–113, div. Q, title I, § 171(e)(2), Dec. 18, 2015, 129 Stat. 3071, provided that: “The
Amendments
made by subsections (b), (c), and (d) [amending this section] shall apply to bonds issued after December 31, 2015.”
Effective Date
of 2000 Amendment Pub. L. 106–554, § 1(a)(7) [title I, § 115(b)], Dec. 21, 2000, 114 Stat. 2763, 2763A–602, provided that: “The
Amendments
made by this section [amending this section] shall apply to obligations issued after December 31, 2001.” Amendment by section 1(a)(7) [title I, § 116(b)(3), (4)] of Pub. L. 106–554 applicable to qualified empowerment zone assets acquired after Dec. 21, 2000, see section 1(a)(7) [title I, § 116(c)] of Pub. L. 106–554, set out as a note under section 1016 of this title.
Effective Date
of 1997 Amendment Pub. L. 105–34, title IX, § 953(b), Aug. 5, 1997, 111 Stat. 888, provided that: “The amendment made by this section [amending this section] shall apply to obligations issued after the date of the enactment of this Act [Aug. 5, 1997].” Pub. L. 105–34, title IX, § 955(c), Aug. 5, 1997, 111 Stat. 890, provided that: “The
Amendments
made by this section [amending this section] shall apply to obligations issued after the date of the enactment of this Act [Aug. 5, 1997].”
Effective Date
of 1996 AmendmentAmendment by Pub. L. 104–188 effective as if included in the provision of the Revenue Reconciliation Act of 1993, Pub. L. 103–66, §§ 13001–13444, to which such amendment relates, see section 1703(o) of Pub. L. 104–188, set out as a note under section 39 of this title.
Reference
Citations & Metadata
Citation
26 U.S.C. § 1394
Title 26 — Internal Revenue Code
Last Updated
Apr 6, 2026
Release point: 119-73