Interest-free loan to charity

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Query: Can I make an interest free loan to a charity and deduct interest based on AFR? Or, do I need to charge and get paid the interest (again, using the AFR as a minimum) and then, if I want gift the interest to the charity both claiming it and deducting it against my income.

Response: An interest free loan to a charitable organization has no federal income tax consequences. 

1. You don't get a deduction because you haven't given anything away (it is a loan, after all - not a gift).  Of course, if you subsequently forgive the loan (or any portion of it), you get a deduction for the amount forgiven.  Nelson Story III, 38 T.C. 936 (1962).
2. The general rule on interest-free loans is that the lender is treated as receiving the payment back from the borrower, thus producing taxable income to the lender. I.R.C. Sec. 7872.  However, the regulations create an exception that allows a donor to lend up to $250,000 to a charity. Reg. 1.7872-5T(b)(9).  Above that amount, the Service will imput the interest income to the donor.

This kind of planning is used most often by a donor who has used up most or all of his percentage limitation on charitable gifts.  The benefit of this transaction is that it allows him to give the use of the income to charity.  Thus, its an income shifting device, and not a direct charitable gift with an accompanying deduction.

Thomas J. Ray, Jr., JD
http://www.wealthcounsel.com/