Question:
Could a church borrow from church members at a 0% interest rate? Do “imputed interest” rules apply to such loans? Is there any limitation that a church member needs to be aware of before loaning funds to the church under these conditions?
Answer:
Churches considering such alternatives for financing are well advised to consult with an attorney experienced in local state securities laws, since non-tax law issues may be more pertinent than tax considerations.
But, yes, a church could potentially receive loan(s) from church members with a 0% interest rate. This type of loan is usually classified as a below-market gift loan. The member-lender in a sense is transferring an annual amount equal to the forgone interest to the church-borrower as a gift. The church-borrower, however, simultaneously transfers such interest back to the member-lender. This is the idea of imputed interest.
Were it not for exceptions, a donor would report equal amounts of the foregone interest as taxable interest income and as a charitable contribution.
Commerce Clearing House’s Master Tax Guide, lists an applicable exception: “… in the case of gift loans between individuals (gift loans between individuals and charities are not discussed) where the total amount outstanding does not exceed $100,000, the amount deemed transferred from the borrower to the lender at the end of the year will be imputed to the lender only to the extent of the borrower's annual net investment income ( Code Sec. 7872(d)). If such income is less than $1,000, no imputed interest is deemed transferred to the lender.” Presumably, the church-borrower will have little net investment income since donors are unlikely to be motivated to grant interest-free loans to ministries that simply invest gift loan money in stocks, bonds or other investment property.
The members of my Federal Taxation I class at Maranatha Baptist Bible College in Watertown, Wisconsin have taken on the challenge of study and research to answer posted questions. Lisa Collogan of Des Moines, Iowa gets credit for this one.
Could a church borrow from church members at a 0% interest rate? Do “imputed interest” rules apply to such loans? Is there any limitation that a church member needs to be aware of before loaning funds to the church under these conditions?
Answer:
Churches considering such alternatives for financing are well advised to consult with an attorney experienced in local state securities laws, since non-tax law issues may be more pertinent than tax considerations.
But, yes, a church could potentially receive loan(s) from church members with a 0% interest rate. This type of loan is usually classified as a below-market gift loan. The member-lender in a sense is transferring an annual amount equal to the forgone interest to the church-borrower as a gift. The church-borrower, however, simultaneously transfers such interest back to the member-lender. This is the idea of imputed interest.
Were it not for exceptions, a donor would report equal amounts of the foregone interest as taxable interest income and as a charitable contribution.
Commerce Clearing House’s Master Tax Guide, lists an applicable exception: “… in the case of gift loans between individuals (gift loans between individuals and charities are not discussed) where the total amount outstanding does not exceed $100,000, the amount deemed transferred from the borrower to the lender at the end of the year will be imputed to the lender only to the extent of the borrower's annual net investment income ( Code Sec. 7872(d)). If such income is less than $1,000, no imputed interest is deemed transferred to the lender.” Presumably, the church-borrower will have little net investment income since donors are unlikely to be motivated to grant interest-free loans to ministries that simply invest gift loan money in stocks, bonds or other investment property.
The members of my Federal Taxation I class at Maranatha Baptist Bible College in Watertown, Wisconsin have taken on the challenge of study and research to answer posted questions. Lisa Collogan of Des Moines, Iowa gets credit for this one.
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