Under the Private Payment Test, what is the maximum percentage of principal or interest payments on bonds that can be secured by private business use?

The correct answer regarding the maximum percentage of principal or interest payments on bonds that can be secured by private business use is 10%. The Private Payment Test is a critical compliance standard under the Internal Revenue Code that relates to the tax-exempt status of bonds issued to finance public projects.

The test stipulates that if more than 10% of the principal or interest payments on the bonds are funded by private business use, the bonds could potentially lose their tax-exempt status. This threshold ensures that the financing primarily serves public interests rather than benefiting private entities excessively, thereby maintaining the integrity of tax-exempt financing for public projects.

Understanding this limitation is crucial for entities involved in public finance and debt management to ensure compliance with IRS regulations and to avoid unintended tax consequences for both the issuer and the bondholders.