Qualified Zone Academy Bonds

IRS Notice 2016
QZAB Application 2017
Frequently Asked Questions

Qualified Zone Academy Bonds (QZABs) are a financing instrument that can be used to carry out much-needed school renovations and repairs. The federal government covers, on average, all of the interest on these bonds, thus enabling schools to save up to 50 percent of the costs of these construction projects. The interest payment is actually a tax credit, in lieu of cash, provided to financial institutions that hold the bonds.

To finance renovation and repair projects, school districts usually issue bonds to raise needed funds. Traditionally, states and local school districts issue bonds and the Internal Revenue Code exempts the bondholders from paying federal taxes on the interest they earn. Many investors consider this an incentive to purchase these bonds; therefore, school districts can sell these bonds at lower interest rates than standard corporate bonds. This tax-code provision allows the district to save about 20 percent of the interest costs in the current market. However, the district must pay the principal and the interest over the life of the bond.

Under the QZAB program, the federal government provides bondholders with a tax credit in lieu of a cash interest payments. The school district or other issuer is then, in general, only responsible for repaying the amount borrowed. This is a substantial benefit because interest payments can equal up to 50 percent of the economic cost of a bond. A QZAB is a better value for the district because, under these tax-credit bonds, the federal government pays, on average, all of the interest, whereas, under tax-exempt bonds, the school district typically recoups only 20 percent of the interest payments.


QZABs can be used for renovation and repair projects, but not for new construction. If allowed by state law, schools may also use QZAB proceeds to invest in equipment and up-to-date technology, develop challenging curriculum, and train quality teachers. Schools can address specific needs associated with aging and overcrowded schools such as infrastructure, technology, health and safety, and environmental and energy efficiency issues.

In this manner, QZAB financing works towards meeting various education goals, including creating digital opportunities for all, establishing schools as the centers of communities, and encouraging private-sector contributions to public education.

Eligibility Criteria

The QZAB program was designed to help schools that have the most need for financial assistance. Eligibility requirements are applied on a school-by-school basis. To be eligible to use a QZAB, a public school must meet one of two criteria:
1. The school is located in an Empowerment Zone or Enterprise Community; or
2. There is a reasonable expectation as of the date of issuance of the bonds that at least 35% of the students attending the school or participating in the program will be eligible for free or reduced-cost lunches established under the National School Lunch Act.

The school is also required to cooperate with businesses to expand learning opportunities and provide students with skills needed for the rigors of college and the increasingly complex workplace. The school is required to receive donations from private entities worth at least 10 percent of the value of the money borrowed. These donations can take such forms as cash, goods, services, and internships or field trips that provide educational opportunities to students. In this way, QZABs help modernize school buildings and foster partnerships between schools, businesses, and communities.

Funding Information

The QZAB program was established under Section 226 of the Taxpayer’s Relief Act of 1997 and, as amended in 1999, appears in Section 1397E of the Internal Revenue Service Code. Each year, states have received a specific amount of QZAB authority based on the number of individuals within each state who have incomes below the poverty level. School districts apply to their state for bonding authority.


For more information about the Qualified Zone Academy Bonds, contact Travis Jordan (605) 773-3349.