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No-Interest Loans
Can we provide an interest-free emergency loan to a church member?

Question:
We have a member that has an emergency and needs $700. Can the church make a loan to this individual with no interest for 6-8 months?

Answer:
No law prevents your church from meeting the emergency needs of a member. However, lending money to the member creates costs and risks to the church. In most cases, the church is better served giving the money to the member as a benevolent gift. Later, if the member desires, they can contribute some money back so the church can assist others.

The size of the proposed loan is unlikely to cause the church to lose its tax exempt status. But that does not mean that the church should be in the business of loaning money. All assets of the church are pledged to be used exclusively for tax exempt purposes. So the loan must further tax exempt purpose. Generally, the IRS has held that lending money does not further an exempt purpose except micro loans (usually under $250) to help new businesses. Loans to members do not further exempt purposes in most cases.

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Posted:
February 23, 2010
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