Church Unrelated Business Income Tax
As a responsible steward of the resources that God has blessed your ministry with; you as leaders are probably looking for avenues to maximize those resources and generate additional revenue streams. This is a responsible endeavor; however it might create unintended tax consequences for your ministry.
I am frequently asked to consult with ministries as they assess their exposure to unrelated business income tax – which is a federal corporate tax on certain revenue streams. Specific unrelated business income tax examples provided by the Internal Revenue Services include:
- Advertising – such as selling advertising space in weekly or annual bulletins, magazines, or website.
- Sale of merchandise that do not have a substantial relationship to the exempt purposes of the organization – such as a coffee shop, retail store or restaurant.
- Facility rental income if there is a mortgage on the property.
- Parking lot rental income
In order for an activity to be considered an unrelated trade or business – three conditions must be met:
- The activity must constitute a trade or business – selling goods or performing services.
- The activity is regularly conducted – activity shows a frequency or continuity and is pursued in a manner similar to comparable commercial activities of a nonexempt organization.
- Not substantially related to the organizations exempt status.
The last condition which is an activity “not being substantially related to the organizations exempt status” is typically the condition that is most misunderstood by ministry leaders. The fact that all the proceeds from the activity are used to fund the ministry does not make the activity substantially related. Many times ministry leaders will tell me that all the profits from their coffee shop or other activity is used to fund ministry operations; so the activity should not be subject to unrelated business income tax. This assumption is incorrect and could result in unexpected fees and penalties for under-reporting unrelated business income taxes.
I would like to highlight that not all activities that appear to be subject to unrelated business income tax are subject to taxation. The IRS provides specific guidance to four exclusions:
- The activity is performed with volunteer labor
- The activity is for the convenience of members – such as a cafeteria
- The activity consists of selling donated merchandise, substantially all of which the organization received as gifts or contributions
- Certain bingo games
There are other caveats that ministry leaders should take note of and you should consult a tax professional to determine if any of the ministry activities are subject to unrelated business tax income.
Dept. of the Treasury – Internal Revenue Service (Rev. March 2012). Publication 598: Tax on Unrelated Business Income of Exempt Organizations. Retrieved from http://www.irs.gov/pub/irs-pdf/p598.pdf
Dept. of the Treasury – Internal Revenue Service (Rev Sept 3, 2013). Unrelated Business Income Tax. Retrieved from http://www.irs.gov/Charities-&-Non-Profits/Unrelated-Business-Income-Tax
Dept. of the Treasury – Internal Revenue Service (Rev Feb 15, 2013). Unrelated Business Income Defined. Retrieved from http://www.irs.gov/Charities-&-Non-Profits/Unrelated-Business-Income-Defined
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