If a corporation invests in municipal bonds, is the interest they receive on the investment tax-free?

Question

I understand that if an individual invests in municipal bonds, they do not have to pay federal income tax on the interest, and usually do not have to pay state income tax on the interest either. But what if a corporation buys municipal bonds, do they have to pay federal income tax on the interest? And do they have to pay state income tax on the interest?

Thank you advance for your generous help.

Answer 1

It depends on the bond. Check with the broker to get details on how much is tax-exempt. Regardless of the filing entity, tax treatment will be the same. Another words, if an individual is exepmt, Corps, P-ships, and trusts are also exempt.

Answer 2

Ak is generally right. If a corporation is putting it's working capital in a municipal money market account the earnings are usually tax free.
The problem comes with the purchase of municipal notes and bonds. If the corporation has debt for any reason the service takes the position that the interest on the debt is non-deductible to the extent of the municipal earnings. The earnings are not taxable but the interest would be non-deductible. The reasoning for this is that the service feels that you are keeping the debt to carry the bonds instead of taking the money and paying down the debt.

Answer 3

The treatment is the same for corps and individuals. One thing you need to pay attention is that any expense incurred associated with buying the bonds such as interest expense (borrowing money to buy the bonds) or transaction fees is disallowed as a deduction for corps when the muni bond is non-taxable.

Answer 4

The interest would be tax exempt in the hands of the corporation. However, if the corporation makes a distribution to its shareholders out of the exempt interest, the shareholders would be taxed on a dividend.

Answer 5

each and each 3 hundred and sixty 5 days, you need to have reported in simple terms the "activity" (era fee) as non-taxable earnings, and not reported the ease (strengthen in the fee of the bond). in case you probably did this incorrect, restoration it making use of style 1040X. in case you acquire the bond at "par" (face fee) and redeem it for the comparable volume at adulthood, then there is commonly no internet benefit once you sell it. you need to checklist the sale, yet there will be no tax. (even nonetheless, in case you do no longer checklist it, then you certainly will ought to pay tax.) in case you redeem (or sell) the bond for extra effective than it value you, then there is in many situations some capital features tax due. in case you redeem (or sell) the bond for decrease than the bond value you, then you certainly've got a "capital loss" (benefit decrease than 0), that can make your tax even decrease than it may be if the bond did no longer exist. in case you acquire the bond at a "decrease fee" (being which you paid decrease than the reported fee at adulthood), then "unique project decrease fee" (OID) calculations are mandatory, that are extra complicated and could require a consultant.