| Why can volunteer fire departments borrow on | | | | you provide an essential government function for |
| low, tax-exempt interest rates? | | | | the community, and that the local political |
| The IRS laws provide a nice benefit for volunteer | | | | subdivision and the community are aware of what |
| fire departments. It provides the ability to borrow | | | | you are doing. |
| money at low, tax-exempt interest rates just like | | | | Second, the bank's contract will usually require you |
| your local government. But the IRS has some | | | | to certify that you will follow the IRS rules and, if |
| rules to follow in exchange for providing this | | | | the IRS declares you as non-qualified, the interest |
| benefit and these rules must be followed so that | | | | rate will revert to the taxable interest rate. This |
| you "qualify" as a tax-exempt borrower. | | | | means that you will pay a higher taxable interest |
| What are the rules that volunteer fire | | | | rate going forward but you will also be liable for |
| departments have to follow to meet the IRS | | | | the extra taxable interest payments in the past - |
| rules? | | | | from the beginning of the loan. |
| | | | Here's why: |
| 1. You must provide fire fighting service to a | | | | The bank can offer you a low, tax-exempt |
| political subdivision that is not protected by | | | | interest rate because the bank does not have to |
| another fire department. | | | | pay income taxes on the interest you pay to |
| 2. You must provide this service under a written | | | | them. Since this large cost (the taxes) don't have |
| agreement. | | | | to be paid, the bank can accept a much lower |
| 3. You must use the borrowed money for a fire | | | | interest rate from a qualified volunteer fire |
| truck or fire station. | | | | department. So, if your financing is dis-allowed, the |
| 4. You must have a public hearing that you are | | | | interest then becomes taxable for the bank and |
| issuing tax-exempt debt (which includes placing | | | | they will pay about 33% of the interest income |
| legal ads in your local newspaper to announce the | | | | to the IRS for taxes on the now taxable interest. |
| public meeting date, time, and place to the public). | | | | The bank can not eat this large cost so its |
| 5. The political subdivision must sign a document | | | | contracts include provisions to compensate the |
| that they are aware that you are borrowing | | | | bank if the loan is found to be taxable. These |
| tax-exempt money and that they approve its | | | | provisions include being able to charge you for the |
| use for providing fire fighting services under the | | | | extra interest to cover the income taxes they |
| written agreement. | | | | now owe. |
| 6. If you place the funds in escrow pending | | | | So, how can a volunteer fire department ensure |
| construction of the fire truck (which is very | | | | that it will meet all the IRS rules? |
| common), you must follow the rules governing | | | | First, it is important to understand that the rules if |
| the use and return on those funds. | | | | you want the low, tax-exempt interest rate |
| 7. You must file an appropriate form (for | | | | benefit available to you. Enlist help from your legal |
| example, IRS form 8038G or 8038GC) with the | | | | or accounting professional to guide you through |
| IRS to notify the IRS that the transaction is | | | | this complex and exact process if you don't feel |
| tax-exempt. | | | | you have a firm grasp on all the requirements. |
| 8. There are a number of other rules and | | | | Second, ensure that the bank you choose has the |
| regulations to follow such as you must use the | | | | experience to help you with this type of |
| fire truck for a public benefit or purpose among | | | | transaction. Remember, even if the bank makes |
| others. | | | | an error, the IRS will contact and impose penalties |
| What bad things can happen if the IRS rules are | | | | upon you as the borrower. The IRS views you as |
| not followed? | | | | the the beneficiary of the the rules and therefore |
| Failure to follow these rules may result in the IRS | | | | you will be penalized if the rules are not followed. |
| "disallowing" your tax-exempt financing. If this | | | | The good news is that there are several firms |
| happens, you may be forced to pay large | | | | across the USA that specialize in financing for |
| penalties and taxes to the IRS. Also, your | | | | volunteer fire departments. Ask the questions so |
| financing will probably revert to a taxable interest | | | | that you feel comfortable that they can help |
| rate (usually about 3% higher) and you'll be forced | | | | ensure you are fully complying with the IRS rules. |
| to pay for the back taxable interest. These can | | | | A disclaimer: |
| cost tens of thousands of dollars for the average | | | | This article is intended to provide general |
| fire truck. | | | | knowledge about the IRS rules and help you |
| Here's why. | | | | formulate the questions you feel you need |
| First, the IRS will penalize you for not following | | | | answered to help qualify for this benefit. This |
| rules. The rules are set up to ensure that only | | | | article is NOT intended as specific legal or |
| volunteer fire departments who are legally entitled | | | | accounting advice and it not a substitute for actual |
| to borrow on these special, low, tax-exempt | | | | legal and/or accounting advice about your specific |
| interest rates receive this benefit. The rules are | | | | situation. Please seek the help of professionals for |
| set to provide a check and balance system that | | | | the help you need in this specific type of |
| you are the community's fire department, that | | | | transaction for your specific situation. |