I Thought the Church Was Tax Exempt

Churches in general are tax exempt and pay no taxes on contributions, limited fund raisers and related church income.  However, there is something called ‘unrelated business income’ tax that requires churches to file form 990-T to report that income.

“Every dollar we make from our activities goes for church ministry.”  The issue is not where the money is used, its how it was earned.  Unrelated business activities of a church may include: operating a revenue generating parking lot when church is not in open for services; selling advertising in the church’s bulletin; handling administrative matters for unrelated organizations for a fee; operating a public restaurant; and selling non-religious items in the church bookstore (popular secular books, cosmetics, secular software and games, computers).

Generally a church may have an insubstantial amount of unrelated business activity (selling candy for a youth project for a month), but when a church operates a full-time business open to the general public such income activity is going to be considered substantial and should be reported on the 990-T form.  If the level of unrelated business income is equal or greater than the church contribution income, the church could lose its tax exempt status as it would appear to be more of a business than a church.

Right now it is more the Department of Revenue of the State than the IRS that is looking into these unrelated business income matters.  The State is trying to find tax income wherever they can.  Some States are trying to tax cell phone tower rents charged by the church.

Look close at the activities the church is involved with to see whether such activities are producing unrelated business income.  If it is, you need to account for it and file a 990-T return with the IRS and whatever form is required by the State.  You are better off taking care of it now than letting the State find you should be filing taxes and assess penalties and interest for back years.

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