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Off budget fire truck financing technique

IRS rules provide the same low tax-exempt interest rates for volunteer fire departments as it does for cities, townships, boroughs, counties, and districts.


By John Hill
First Bankers

Most communities finance their fire trucks for their fire departments. But did you know that the IRS rules can help your community buy a fire truck without the payment becoming a part of the local government's budget?

The rules
IRS rules provide the same low tax-exempt interest rates for volunteer fire departments as it does for cities, townships, boroughs, counties, and districts. That means that if your community has a volunteer fire department, the department can borrow the money at the same interest rates.

The benefit is that the loan or lease will not be part of the government's budget. The fire department can borrow the funds on its own merit and the payments will appear on its budget and financial records. The local government will not have to guaranty the payments.

The process
The IRS rules have a couple of extra steps for volunteer fire departments to qualify for tax-exempt low interest financing.

First, the fire department must have a public meeting. This means your department will publish a notice in your local newspaper and hold a publicly open meeting about financing the fire truck.

Second, the local government that the fire department serves must acknowledge that the fire department provides firefighting services and that the department is borrowing the money. This step does not usually mean that the local government is guarantying the obligation.

The fine print
This technique works for volunteer fire departments that are organized or incorporated separately from the local government. This means the fire department is a standalone entity and is a 501(c)3 or 501(c)4 corporation recognized by the State and the IRS as a not for profit corporation. The fire department will have a separate federal tax identification number.

The volunteer fire department will have to provide financial information to support that it can afford to pay the payments. This usually means that the fire department can show it has enough income from its fire service contracts, fundraisers, donations, etc., to pay its expenses and the fire truck payment.

All not-for-profit organizations, including fire departments, are required to file some version of the IRS form 990 annually. This information is usually accepted as sufficient financial information for the credit analysis. This information is not to be deemed as advice, so please discuss your tax filing requirements with your tax professional.

Summary
With municipal budgets getting squeezed more and more, fire departments are learning how to take advantage of the IRS tax rules to get the fire trucks they need without stressing the municipal budget and at the same low interest rates.  

About the author

John R. Hill is an apparatus budgeting consultant for First Bankers, which helps fire departments avoid common financial mistakes that are made in the apparatus purchasing process. John also writes a weekly Web site column on FireFinanceGuy.com.

 

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