The Internal Revenue Service has rules in place that limit a local government’s ability to use financing proceeds to reimburse itself for project expenditures made before you actually close on your financing. Even those rules are now more than 20 years old, I often get questions about how those rules work. Also, we continue to find the occasional project in which a local government can’t go forward the way it wants to because it has failed to comply with these rules. So, I thought it might be worthwhile to provide this quick summary of the reimbursement rules.
Here is the basic rule for reimbursement — all financing proceeds must be used for expenditures made after the closing date, except that you are allowed to reimburse yourself for expenditures (1) paid not more than 60 days prior to your adopting a qualifying reimbursement resolution (or 60 days prior to closing, if you have not adopted such a resolution), (2) plus any amounts representing engineering, design and similar preliminary expenses in an aggregate amount not exceeding 20% of the amount financed (but purchasing land can never count as a preliminary expense), (3) plus an additional amount of up to the lesser of $100,000 or 5% percent of the amount financed. You generally must close on your financing and make your reimbursement (by an appropriate notation on your books) not later than eighteen months after the date you complete your project and place it in service (but in any event within three years after the original expenditure is paid). The reimbursement resolution itself must meet certain requirements.

Here’s a link to a more complete handout on the reimbursement rules and here’s a link to a sample reimbursement resolution you can adapt to your project and then have your governing board adopt to establish your intent to reimburse.

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