Interest Rate Disallowances and the Myriad Rules for Tax-Exempt Investments

The percentage of interest expense disallowance varies based on the type of tax-exempt investments. The amount of disallowance can be significantly affected by the current interest rate environment. In today’s generally low-rate environment, the amount will often be smaller than expected, so banks should calculate the tax-equivalent yield on all potential investments, rather than eliminating certain types from consideration.