If a corporation invests in municipal bonds, is the interest they receive on the investment tax-free?

I understand that if an individual invests in municipal bonds, they do not have to pay federal income tax on the interest, and usually do not have to pay state income tax on the interest either. But what if a corporation buys municipal bonds, do they have to pay federal income tax on the interest? And do they have to pay state income tax on the interest?

Thank you advance for your generous help.

It depends on the bond. Check with the broker to get details on how much is tax-exempt. Regardless of the filing entity, tax treatment will be the same. Another words, if an individual is exepmt, Corps, P-ships, and trusts are also exempt.

The treatment is the same for corps and individuals. One thing you need to pay attention is that any expense incurred associated with buying the bonds such as interest expense (borrowing money to buy the bonds) or transaction fees is disallowed as a deduction for corps when the muni bond is non-taxable.

Ak is generally right. If a corporation is putting it's working capital in a municipal money market account the earnings are usually tax free.
The problem comes with the purchase of municipal notes and bonds. If the corporation has debt for any reason the service takes the position that the interest on the debt is non-deductible to the extent of the municipal earnings. The earnings are not taxable but the interest would be non-deductible. The reasoning for this is that the service feels that you are keeping the debt to carry the bonds instead of taking the money and paying down the debt.

The interest would be tax exempt in the hands of the corporation. However, if the corporation makes a distribution to its shareholders out of the exempt interest, the shareholders would be taxed on a dividend.