Non Profit Loan To Employee

[boynton35]

Can a non profit organization(a private school in this case) give a loan to an employee for continued education that will further assist that employee to be an asset to the organization?

ANSWER: What interest does the loan call for? If at or above market interest rates, let me know.  If at no interest or below market interest rates, let me know that. After you give me that information I will reply further.  I am assuming that the loan is going to be unsecured.

Harvey Mechanic, Attorney at Law - [email protected]

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.    

---------- FOLLOW-UP ----------

It would be an unsecured loan under $10,000 with below market interest rates.  Unsecured, but stating that any unpaid balance will be reported to the borrower on a W2.

[Lauraine]

See www.irs.gov/pub/irs-tege/eotopicc90.pdf and on pdf page 5 we

see, "Other case examples of inurement include... inadequately

secured loans, Lowry Hospital Association  v. Commissioner, 66 T.C.

850(1976)."

If the loan is inadequately secured and that is given to an insider

then the IRS treats the proceeds as compensation to the insider

which may result in a total of excessive compensation to that

person which is a  violation of IRS regulations.

www.irs.gov/irm/part7/irm_07-025-003-cont02.html#d0e4749

Further, the organization is jeopardizing its exempt status, for

Internal Revenue Code section 501(c)(3) which is available at:http://pages.citebite.com/w8p5e1ayxjv has, in part, that the 501(c)(3) organization must be "operated

exclusively for religious, charitable, scientific, testing for

public safety, literary, or educational purposes ... no part of the

net earnings of which inures to the benefit of any private

shareholder or individual".

That term is defined in regulations 26 C.F.R. 1.501(a)-1(c) "The

words `private shareholder or individual' in section 501 refer to

persons having a personal and private interest in the activities of

the organization."http://goo.gl/MBjGG on the right column of page 2 Inurement(benefits to insiders) is discussed by the IRS at

www.irs.gov/pub/irs-tege/eotopicc90.pdf

(It takes a while to load the 52 page pdf file)

and specifically note, on the bottom of page 10,

"even a minimal amount of inurement can result in disqualification

for exempt status, whereas private benefit must be substantial in

order to jeopardize exempt status." I have in my profile that this free forum is only for general questions relating to IRS federal exemption issues of 501(c)(3) organizations.  The loan may also violate state law of your state.

Harvey Mechanic, Attorney at Law - [email protected]

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.