Tax Anticipation Note (TAN)

What Is a Tax Anticipation Note (TAN)?

A Tax Anticipation Note (TAN) is a short-term debt security issued by a state or neighborhood government to fund-raise for a public project. The debt is repaid with future tax collections.

Municipal governments use tax anticipation notes to borrow money, regularly for one year or less and at a lower interest rate than would be accessible from different lenders. The money finances capital expenditures like the construction of a road or repairs to a building.

Understanding a Tax Anticipation Note (TAN)

As a rule, a note is a debt instrument like a bond. It is issued by a borrowing entity to bring funds up in the short term.

Like bonds, notes are interest-bearing securities that are sold with the commitment of periodic interest payments to the investor however long the bond's life might last. The principal is repaid when the note arrives at its maturity date. Notes normally mature in one year or less, in spite of the fact that notes of longer maturities are sometimes issued.

The payments are typically produced using a defined revenue source.

On account of the tax anticipation note, the defined revenue source is the following year's tax revenues.

Benefits of a TAN to Investors and Governments

Giving a TAN allows the government to push ahead on a public project without waiting to promptly have the cash close by. The interest cost is low compared to the costs of financing from different sources like a commercial bank.

For investors, a TAN is a somewhat safe decision with a moderately low rate of return.

Nonetheless, the interest income earned from a TAN is generally tax-exempt at both the state and federal levels, adding something back to the return on investment.

A TAN is a type of municipal bond, a debt security issued by neighborhood governments to assist with financing projects.

TAN Example

For instance, expect the government might want to begin the development of a public park in June 2022. The total budget for the undertaking is $5 million.

The city just has $2 million in spare cash. Thus, expecting tax revenues that will be received in April 2023 after the cutoff time for filing taxes, the city might issue tax anticipation notes with a face value of $3 million to mature in May 2023.

When it gathers taxes from people and organizations in 2023, the city will retire the TANs and repay the costs of building the park.

Special Considerations

Financing with tax anticipation notes assists governments with streamlining the highs and lows in their revenue cycles while the timing of their receipts doesn't match the timing of their expenditures.

The maturity dates on the notes are fixed and can't be altered. Furthermore, the proceeds received from the notes can't be redirected for different projects or expenses other than the one stated in the indenture.

The revenue received from taxes must be utilized to initially repay the TAN holders before any excess can be utilized for different projects. For instance, the indenture might state that the security of an issued note depends on the income tax proceeds they hope to get in 10 months.

TANs are one of several types of anticipation notes that state and nearby governments can use to fund a short-term need. Others incorporate revenue anticipation notes (RANs) and bond anticipation notes (BANs).

Features

• TANs are typically offered at a discount to the buyer. At the point when the note matures, the buyer acquires interest.
• The notes are normally issued with maturity dates of under a year and generally terminate around or shortly after yearly taxes are due to be paid.
• A tax anticipation note (TAN) is a short-term debt security issued by a government.