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"Benevolent Loans", an Oxymoron?

Question:

A reader asks a follow-up question to my detailed posting on July 15, 2010, regarding churches offering non-interest bearing loans to their pastors.

Employee Loan by Church to Pastor

Do the same rules apply for a zero-interest loan to a church member (not an employee)? Does the difference between the applicable federal rate and 0% need to be reported on a Form 1099-MISC or other form?

Answer:

This answer may not be what some will expect, but here it goes:

Since the loan is not to an employee or independent contractor in exchange for services rendered, I must assume that the loan is disbursed as a benevolent activity of the church. Therefore, the foregone interest is essentially the "benevolent" act and, as such, is non-taxable (not reportable). HOWEVER, as a church member who has given this kind of "benevolence" a lot of thought, I strongly recommend that the above proposal to loan money to a member as a "benevolent" act be abandoned. I suggest that churches consider a policy along the lines of the following:

"[Church] has established a [benevolent fund] to meet the special financial needs of members. From time to time, those in need may ask for a loan rather than to receive a benevolent gift. The members of [Church] are not of a mind to do so when God has provided us the money (Proverb 3.27). We would much rather lend to the Lord by giving to others (Proverb 19.17)."

The following statement may be provided to benevolence recipients:

"Your brothers and sisters in Christ at [Church] earnestly rejoice to meet the needs of others. We trust that the gift God has provided will meet your immediate need at this time and will encourage your walk with the Him. We know that God loves a cheerful giver so we extend this help with absolutely no expectation of repayment.

"We do understand from the Apostle Paul’s instruction to the believers at Corinth, however, that you might desire to respond to God’s provision in some tangible way. Paul gave instructions to the church about the same kind of fund that provides for others’ needs at [Church].

"He said, 'For if there be first a willing mind, it is accepted according to that a man hath, and not according to that he hath not. For I mean not that other men be eased, and ye burdened: But by an equality, that now at this time your abundance may be a supply for their want, that their abundance also may be a supply for your want: that there may be equality: As it is written, He that had gathered much had nothing over; and he that had gathered little had no lack' (II Corinthians 8.12-15).

"If you at some time in the future wish to share in meeting others’ needs just as yours are now being met, we encourage you to give privately and confidentially to the [Church Benevolent Fund]."

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