Skip to main content

Interest-Free Loans to a Church

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.

Comments

  1. This comment has been removed by a blog administrator.

    ReplyDelete

Post a Comment

Popular posts from this blog

Housing Allowance when Bartering for Rent Payments

Question:

If a minister rents his principal residence, but he performs services (mowing the lawn, repairing the roof, etc.) in lieu of rent, can he still qualify the rent amount for a housing allowance tax benefit?

Answer:

Of course, bartering income is taxable. The Internal Revenue Code interprets that above situation as follows: tenant/minister receives taxable income for the fair market value of the services he provides, andtenant/minster pays landlord for renal of residence. The minister in this case reports taxable income for services provided in lieu of rent. It is also likely subject to self-employment tax. He may then claim as qualifying housing allowance expense equal to the amount he "pays" for rent of his personal residence. Essentially, there is no difference than if the minister and his landlord simply traded checks.

See a past MinistryCPA post regarding this topic: http://ministrycpa.blogspot.com/2016/09/services-to-church-in-lieu-of-rent-of.html

Mission Trips Involving Both Charitable and Personal Time

Question:

A church group went on a two-week mission trip, and a few of the members stayed an additional two weeks for personal time. Will the members who stayed the two additional weeks be able to deduct expenses from the trip?

Answer:

IRS Pub 526 covers the topic of Charitable Contributions and, more specifically, travel expenses associated with charitable trips. The publication states that travel expenses will be deductible “if there is no significant element of personal pleasure, recreation, or vacation in the travel.” The publication also states, “The deduction for travel expenses won't be denied simply because you enjoy providing services to the charitable organization. Even if you enjoy the trip, you can take a charitable contribution deduction for your travel expenses if you are on duty in a genuine and substantial sense throughout the trip. However, if you have only nominal duties, or if for significant parts of the trip you don't have any duties, you can't deduct you…

403(b) Contribution Calculations Exclude Housing Allowance

Question:

Should 403(b) contributions and the subsequent match be based on the pastor's total income from the church (including housing allowance) or just from the salary minus housing allowance?

Answer:

According to Richard R. Hammar, J.D., LL.M., CPA, in his book 2015 Church & Clergy Tax Guide, “Section 107 of the tax code specifies that a minister’s housing allowance (or the annual rental value of a parsonage) is not included in the minister’s gross income for income tax reporting purposes. Therefore, it would appear that the definition of includible compensation for purposes of computing the limit on annual additions to a 403(b) plan would not include the portion of a minister’s housing allowance that is excludable from gross income." 

Hammar's Church Law and Tax Report is an excellent resource that many ministries should consider as annual subscribers.