This Week's LessonWeek of September 22
This lesson focuses on Part 2 of Loans to Pastors. You can review the Executive Summary to obtain the key points or read the Weekly Lesson for a more thorough presentation of this topic. Start by completing the following interactive quiz to test your knowledge.
A church loans its senior pastor $20,000 to assist with the down payment on a new home. The pastor signs a promissory note agreeing to pay back the loan amount in five annual installments of $4,000, without interest. What are the tax consequences, if any, of this transaction?
Instructions Click on the correct answer for each of the following questions.
Many churches have made loans to a pastor. But few church leaders understand the legal and tax implications associated with such loans. For example, the nonprofit corporation laws of many states prohibit incorporated churches from making loans to an officer or director. Such laws often will apply to senior pastors, since they typically are officers or directors of the church. Associate pastors also may be affected in some cases. Church leaders also need to be familiar with the tax implications of these loans. Most importantly, if a loan is "interest free" or at a "below market" rate of interest, then the pastor to whom the loan was made may realize taxable income from the transaction that must be properly reported by the church. No-interest or low-interest loans also may constitute prohibited "inurement" of the church's assets to a private individual, thereby jeopardizing the church's tax-exempt status. This week's lesson provides pastors with information they need to evaluate such loans.