Almost all of you have had to cancel your fundraiser galas because of the Covid-19 outbreak. Obviously, this will hurt your program efforts. Fortunately, there is a little known but effective way to bridge the gap: ask your important donors for a loan. In this article we outline what you need to know.
The tax law allows your donors to make a loan of any amount up to $250,000 with no interest for as long as they are willing. This can help you bridge your funding gap and ease any financial pain because of Covid-19. . There are a number of important rules and considerations you need to consider before asking your donor(s) for a loan.
First, make sure you document the loan as a bank would document the loan. The promissory note should include the amount of the loan, that it is interest free, and what repayment expectations are. If it is not documented, the IRS will consider it a gift. In addition, if something happens to your donor, the family may expect the money back, and you obviously do not want an unhappy family.
Second, the maximum loan can only be $250,000. If the loan is for more than that, the IRS will want the donor to report interest income based on the prevailing IRS interest rate for the note. Your donor will not be happy about it. The interest rate is called the Applicable Federal Rate. The rates are currently very low and will vary according to the length of the loan.
Finally, while the donor has the option of forgiving some or all of the loan, make sure there is no pre-arranged plan to forgive the loan. It should be strictly up to the donor/lender when or if it is forgiven. If the donor forgives the loan, (s)he can take the forgiven portion as a charitable deduction on their tax return, if they itemize deductions.
This idea is perfect for a donor who doesn’t itemize or may not be in a position to itemize deductions. It is also a good arrangement if they have bunched their itemized deductions and can’t’ take any more charitable deductions this year.
The loan idea is not used often, but if you are in a cash squeeze because of Covid-19 , consider asking an important donor. If you have questions, please call.