Skip to main content

Employee Loan by Church to a Pastor

Question:

A church is considering providing a non-interest loan to a pastor for purposes of purchasing a home. What are the tax implications for the church should it choose to extend such a loan?

Answer:

There are non-tax considerations of the above arrangement that I will discuss later, but, first, the tax considerations.

According to IRS Publication 15-A:

"In general, if an employer lends an employee more than $10,000 at an interest rate less than the current applicable federal rate (AFR), the difference between the interest paid and the interest that would be paid under the AFR is considered additional compensation to the employee."

As of July 2010, the annualized AFR for long-term loans is 3.94% (Revenue Ruling 2018-18, Table 1). If a church gave an interest free loan, then the foregone interest would be reportable as taxable income to the pastor on Form W-2. If any portion of the loan principal is forgiven, that amount will also be taxable.

The IRS advises its auditors to review these situations carefully to assure that bona fide loans exist and that they are not "cleverly disguised" forms of additional compensation:

"Factors that are indicative of a bona fide loan are 1) existence of a promissory note, 2) cash payments according to a specified repayment schedule, 3) interest is charged, and 4) there is security for the loan.

"Loans to executives should be reviewed to determine if they are bona fide and to determine if the terms are being followed. Is there a written document detailing the terms of the loan, payment over a certain number of years or is payment on demand; is the interest rate at market or at a below market rate of interest; is the loan listed on the company’s balance sheet as a receivable? Are the terms of the loan being followed – payments are to be made monthly and the executive is not making payments, etc. (Source: IRS Executive Compensation - Fringe Benefits Audit Techniques Guide (02-2005))."

The non-tax considerations related to what the IRS calls "private inurement." A tax-exempt organization may risk its status if its resources are misdirected to benefit private individuals. It is not likely that a small loan (e.g. $20,000 for a pastor's down payment on a home) will be viewed as private inurement.

Comments

  1. Would the interest need to be reported each year on the W-2 or if we just learned this could we "catch up for past years".

    ReplyDelete
  2. The 2014 W-2 should only include the earnings of 2014; do not include past year's errors on this year's W-2.

    Here are two ways to handle the errors from the past:

    1) File corrected W-2's for the affected years.

    2) Inquire whether the pastor reported the in-kind benefit as taxable income and therefore, no under-reporting has occurred. If he also incorrectly omitted the income, preparation of amended returns are required.

    ReplyDelete

Post a Comment

Popular posts from this blog

Rental of a Church Parsonage to a Non-Minister

Question: A church owns a parsonage, but the pastor does not use it as he owns his own home. The church rents the parsonage to a tenant other than a minister or employee of the church. Will the church be responsible for paying income tax on these monies as Unrelated Business Income (filing a Form 990-T) even if the money is used to carry on the business of the church? Answer: Whether the money is used for church purposes is irrelevant.  IRS Publication 598  states: "If an exempt organization regularly carries on a trade or business not substantially related to its exempt purpose, except that it provides funds to carry out that purpose, the organization is subject to tax on its income from that unrelated trade or business." Fortunately, in the case of rental income from real property, such income is "excluded in computing unrelated business taxable income" (Publication 598). Caution: see content below regarding debt-financed property.  However, a second concern not a...

How can my ministry expenses be covered by the church?

     How can my ministry expenses be covered?                            Many ministers use their personal autos for ministry purposes. Their employers can reimburse these costs using a standard mileage rate published by the IRS. The per mile rate represents employees’ entire reimbursable cost other than highway tolls and parking tabs. If not covered by use of the ministries’ credit card, other costs can be reimbursed as well—business and travel meals, lodging, office supplies, and professional library purchases among them. Some ministries reimburse travel costs using per-diems published by the IRS. If employee business expenses are not reimbursed, the personal tax deduction benefit to the individual minister is severely limited. Non-taxable reimbursements after documentation is provided to the employer follows IRS rules for accountable plans. Non-taxable cash advances before expenses are in...

What health insurance coverage can I get as a minister?

    What are my options for health coverage as a minister?                       Many churches and Christian organizations have discontinued providing employer-paid group health plans. In lieu of paying out extremely expensive, one-size-fits-all insurance premiums, some have opted to provide taxable stipends and let employees shop for their own coverage. The good news: you can choose your own. The bad news: the stipend may not be enough and securing coverage can be complicated. Health care sharing plan options can be more economical. But they don’t qualify as standard health insurance: health care providers can balk, and the monthly subscriptions are not tax deductible. The Marketplace ( www.healthcare.gov ) offers alternatives, including advance premium tax credits to help with the monthly costs. Watch out for unpleasant surprises, however, since the tax credits must be reassessed when you file your annual Form...