Arbitrage rebate spending exceptions: 6-month, 18-month and 2-year

Last updated 6 November 2026 · Atesen Software

Short answer. An issue is treated as meeting the rebate requirement for the proceeds a spending exception covers if they are spent on schedule: all within 6 months; 15%, 60% and 100% within 6, 12 and 18 months; or, for a construction issue, 10%, 45%, 75% and 100% within 6, 12, 18 and 24 months. The exceptions are optional, independent of each other, and refunding issues can use only the 6-month exception.

1. The official method

6-month exception. The gross proceeds are spent for the governmental purposes of the issue within the 6 months beginning on the issue date, and the rebate requirement is met for amounts not required to be spent in that period (26 CFR 1.148-7(c)). For this test gross proceeds leave out a bona fide debt service fund, a reasonably required reserve or replacement fund, and a few other amounts listed in (c)(3). Under IRC 148(f)(4)(B)(ii) the period is 1 year for a part of the proceeds not above 5 percent of the issue, if no bond is a private activity bond (other than a qualified 501(c)(3) bond) or a tax or revenue anticipation bond.
18-month exception. At least 15 percent within 6 months, 60 percent within 12 months and 100 percent within 18 months of the issue date, all gross proceeds qualifying for the initial temporary period, and the rebate requirement met for amounts not required to be spent. Reasonable retainage may be spent within 30 months. For the first two periods, investment proceeds are counted at the issuer's reasonable expectations on the issue date (1.148-7(d)).
2-year exception, construction issues. At least 10 percent within 6 months, 45 percent within 1 year, 75 percent within 18 months and 100 percent within 2 years of the available construction proceeds; reasonable retainage within 3 years (1.148-7(e)). A construction issue is a non-refunding issue where the issuer reasonably expects at least 75 percent of the available construction proceeds to go to construction of property owned by a governmental unit or a 501(c)(3) organization (1.148-7(f)).
De minimis. A failure of the final spending requirement of the 18-month or 2-year exception is disregarded if the issuer exercises due diligence to complete the project and the failure is no more than the lesser of 3 percent of the issue price or $250,000 (1.148-7(b)(4)).
What counts as spending. Interest on the issue counts as an expenditure for the governmental purpose; principal of the issue does not (1.148-7(b)(3)).
Refundings. The only spending exception that applies to a refunding issue is the 6-month exception (1.148-7(b)(1)(ii)).
Optional. Each exception is independent, and an issuer may apply the rebate requirement even to an issue that meets one (1.148-7(a)(2)-(3)).
Debt service fund. The earnings of a bona fide debt service fund are treated separately; an issue with average annual debt service of $2,500,000 or less is treated as meeting the $100,000 limit (1.148-3(k)).

2. Where doing it by hand stops

Each test is simple; the work is the evidence. By hand you list every expenditure of the issue by date, decide which funds count as gross proceeds for each exception, measure the spent share at each milestone against the issue date, handle retainage and the de minimis amount, and repeat for each exception because an issue may fail one and meet another.

Bondtally runs the 6-month (with the 1-year, 5 percent rule), 18-month and 2-year schedules on the spending you enter, with retainage and the de minimis rule, shows each milestone with the amount and share spent, marks a period still open as pending, and does not offer the 2-year exception to a refunding or a non-construction issue. The limits: you enter the spending that counts as gross proceeds, so it does not apply the gross proceeds exclusions or the initial temporary period condition for you, and the construction-issue status is your input. A shortfall near the margin is a question for bond counsel or a rebate analyst.

Questions this page answers

What are the arbitrage rebate spending exceptions?

The 6-month exception, the 18-month exception and the 2-year construction exception (26 CFR 1.148-7(a)).

What is the 18-month spending schedule?

At least 15 percent of gross proceeds within 6 months, 60 percent within 12 months and 100 percent within 18 months of the issue date, with reasonable retainage allowed until 30 months (26 CFR 1.148-7(d)).

Can a refunding issue use the 18-month or 2-year exception?

No. The only spending exception applicable to a refunding issue is the 6-month exception (26 CFR 1.148-7(b)(1)(ii)).

What is the de minimis rule?

A failure to meet the final spending requirement of the 18-month or 2-year exception is disregarded if the issuer used due diligence and the failure is no more than the lesser of 3 percent of the issue price or $250,000 (26 CFR 1.148-7(b)(4)).

3. Check an issue on a sample, free

Open the sample issue and see each spending exception tested milestone by milestone, with the amount and share spent, with no sign-up. Open the free sample

Downloading the report, workbook, Form 8038-T worksheet and calendar for your own issue needs a license: Issuer $474 for the first year with FOUNDING40 (list price $790), applied automatically at checkout until 30 Nov 2026.

Sources: 26 CFR 1.148-7 (eCFR); 26 CFR 1.148-3 (eCFR); IRC 148 (Cornell LII). Bondtally is independent software, not affiliated with the IRS, and not tax or legal advice.

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