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QUESTION
As a pastor, I am periodically asked by church members if the church can loan them money. I know this is not a great idea, but what are the ramifications of churches making such loans? Is it ever appropriate to make such a loan, or is it against any laws to do so?

ANSWER
By Richard D. Locke CPA
Locke & Associates, PC

In answer to your question, as to whether or not churches can loan money to members; you are correct, it is not a good idea.

The IRS believes it is a privilege for churches and 501(c) 3’s to be able to give a tax deduction. Therefore, the personal use of any monies, including loaning money to a member, is not advisable. First there’s the potential for loss; and secondly the personal inurement rules would apply to relatives and employees. I do not believe it is against the law, but it could have the appearance of wrong doing.

The IRS requires interest computed on all loans of $10,000 or more. Not only would we have to charge interest, but we would need signed notes and repayment schedules. All of this does not seem feasible for individuals who are short on money, and it puts the church in a position of being a lender, with the borrower servant to the lender.

It would be better to have a solid benevolence policy in place that would allow the church to give money, rather than laying a further burden on the members to pay it back.


Richard D. Locke is a certified public accountant with over forty years of experience. His firm, Locke & Associates, P.C., is a full service accounting firm which specializes in taxation and nonprofit services. The firm has six certified public accountants servicing approximately one thousand clients in the United States and thirty countries. You can reach Richard D. Locke, CPA at 918-488-0880.

Click here to see a sample Benevolence Fund Policy.

 

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