Private use refers to when a project financed by municipal bonds is used in trade or business of an entity other than a state or local government entity. The amount of private use determines whether the bond interest is exempt from federal income taxes.
Bonds issued by state and local governments and related entities are tax-exempt if they are used to finance projects for state or local governmental purposes (e.g., an office building or state prison). Private use, by contrast, refers to use by a private entity, such as a corporation. Common examples of private use include management contracts, cafeterias with commercial food vendors, ATMs, and vending machines, as well as research contracts at higher educational facilities. Use by the federal government is also considered private use (e.g., a federal post office in an office building).
Private use is determined by looking at the aggregate of both direct and indirect use by all nongovernmental persons. Bonds may contain a certain amount of private use and remain tax-exempt, but bonds with private use above the threshold are taxable.