Below Market Interest Loan to Un-Disadvantaged Business Owners

credit: Tom Copeland Blog

X is a business enterprise which is not owned by low-income persons or minority group members, but the continued operation of X is important to the economic well-being of a deteriorated urban area because X employees a substantial number of low-income persons from such area.

Conventional sources of funds are unwilling or unable to provide funds to X at reasonable interest rates. Y, a private foundation, makes a loan to X at an interest rate below the market rate for commercial loans of comparable risk.

The loan is made pursuant to a program run by Y to assist low-income persons by providing increased economic opportunities and to prevent community deterioration. No significant purpose of the loan involves the production of income or the appreciation of property.

The investment significantly furthers the accomplishment of Y's exempt activities and would not have been made but for such relationship between the loan and Y's exempt activities. Accordingly, the loan is a program-related investment.

This is an illustration modified from examples provided by the Internal Revenue Service. It is not a legal opinion on the tax treatment of any specific agreement between a private foundation and other entity.