In the past few years, the IRS has changed its guidance on whether "management contracts" result in private business use for purposes of the restrictions on use of property financed with tax-exempt bonds. This update describes the new guidance and responds to questions that have arisen in their implementation.

The new rules are "safe harbors" set forth in IRS Rev. Proc. 2017-13. They apply to service contracts entered into or renewed on or after August 18, 2017 (except for certain renewals made pursuant to an option to renew).

The rules apply to tax-exempt governmental bonds issued for the benefit of State and local governments and to qualified 501(c)(3) bonds issued for the benefit of section 501(c)(3) organizations. Although the rules refer to "management contracts," they apply to most types of service contracts.

The rules need to be applied by the users of property financed with tax-exempt bonds, which usually are the governmental issuers, in the case of governmental bonds, or exempt organization borrowers, but can also include other users, such as affiliates of an issuer or borrower. All such users are referred to as "borrowers" in this update.

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