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Abstract: 

Following enactment of the American Recovery and Reinvestment Act (ARRA), not-for-profit organizations have sought a break on the interest rate being charged on their bank loans on the assumption that under ARRA such interest payments are tax-exempt. But just because the borrower files a federal Form 990 instead of a federal Form 1120 does not make the interest paid to the lending bank tax exempt. The Section 501(c)(3) organization is tax-exempt, not the interest on its obligations—most of the time. This column covers the exceptions to the rule—i.e., situations where a loan to a Section 501(c)(3) entity may result in tax-exempt income for a bank lender.

Keywords: interest expense disallowance provisions; private activity bonds; use of proceeds requirements; debt-tracing rules

Affiliations:  1: Crowe Horwath LLP.