Q&A: Pastor's Taxable Income?

Q: The elders of our church approved and provided a ten-year no interest loan of $50,000 to our new senior pastor to assist him with purchasing a house. It is my understanding that we must report to the IRS the interest waived as taxable income to him. How do I find the standard interest rate recognized by the IRS and how do I calculate the pastor's taxable income? Are there other issues of which we should be aware?

A: Let me mention four issues that are implicated by such a transaction.

  1. Imputed interest. Any "below market interest rate" loan of $10,000 or more triggers taxable income in the amount of the interest that would have accrued at the "applicable federal rate" of interest. The long-term AFR that applies to loans in excess of nine years is adjusted monthly by the IRS. The rate that applied at the time of publication of this newsletter was 3.57 percent, compounded annually.

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