We previously asked church leaders about the following situation:
A church member who owns the local franchise for a fast food restaurant chain offers to donate a percentage of sales one evening a month to the church's building fund if the church agrees to tell the congregation about the offer.
How should a pastor respond to such an offer?
A pastor being approached with such an offer of what appears to be
free money is wise to tap on the brakes and ask more questions before respondingno matter how desperately slow the building fund is growing.
While the generous business owner may call his proposal a donation, the people who designated the church as a tax-exempt organization quite likely look at it differently. Section 512 of the United States tax code defines unrelated business taxable income as
the gross income derived by any organization from any unrelated trade or business regularly carried on by it. In Section 513 the term
unrelated trade or business is defined as
any trade or business the conduct of which is not substantially related (aside from the need of such organization for income of funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501.
You may ask why all this is important? A little earlier in the tax code, in Section 511, one learns that a tax is imposed on unrelated business income, also known as UBIT.
The threshold for reporting UBIT is $1,000 in gross income from all sources unrelated to an exempt organizations core business. Reaching that threshold obligates the church to file a Form 990T no later than the fifteenth day of the fifth month after the tax year ends (May 15th if your church operates on a calendar year). Determining whether church income from sources other than advertising is considered unrelated business income can be complicated and is based on a multitude of factors which need to be taken into consideration on a case by case basis. Its not our intent to venture into that quagmire at this time, but we will be glad to steer you to qualified firms that deal with UBIT regularly should you need help.
Earlier we used the phrase
quite likely in saying that the IRS wouldnt look at such an offer as a donation. Thats because there is an exception. If the donors business name and address is published by the church and is solely for recognition as a donor and there is no accompanying slogan or call for action, then the funds received are considered a donation.
But part of the original situation that we opened with was that there was an expectation that the church would communicate to its congregation that the money to be received was based on the amount of business the business owner did during a specified time period. If the notice includes something like
come join us for tasty food and great fellowship the money received is taxable.
Some churches assume that if unrelated business income funds are used for its tax exempt purposes, that the money is not taxable. Since its not where the money will be used, but rather its source that determines UBIT, this is an incorrect assumption.
Even if a church doesnt meet the $1,000 filing threshold, it may want to consider filing a form 990T if it has any unrelated business income. The reason can be summed up simply by the term
statute of limitations. If a church never files an income tax return the statute of limitations runs forever. But a filed return brings into play the normal statute of limitations of three years. Some churches choose to file Form 990T simply to close the door on the IRS being able to do anything about mistakes made decades earlier by an earlier pastor or leadership team.
If a church decides that payment of UBIT for receipt of advertising fees for
church night at a local fast food restaurant is acceptable, it still needs to determine if the fees it will receive measure up to the IRS standard of what is considered reasonable. In other words, would the amount of advertising and size of audience that the church plans to provide be comparable to that provided by a commercial entity doing the same thing. A media buyer at a local advertising agency would be a good place to start in determining reasonableness.
By not determining a reasonable amount for the advertising provided, the result could be that the church is providing a private benefit to the business owner wanting his or her
donation advertised to the church. The difference between a reasonable amount and the amount the church actually receives would indicate the amount of private benefit.
If the generous business owner also happens to be an insider in the church, such as a board member or an officer, or a relative of an insider in the church the IRS would classify him or her as a
disqualified individual. The tax court has ruled that a private benefit of more than one dollar to a disqualified individual is considered inurement. Inurement can be the basis for a church losing its tax exempt status. However the IRS is more likely to assess an excise tax on the person receiving the inurement.
If the amount of inurement is promptly repaid to the church the amount of the excise tax is 25 percent. If repayment is not promptly made the amount of excise tax imposed jumps to 200 percent. In addition church board members involved in the decision to grant the benefit to the insider could also personally face an excise tax.
Other churches can be great resources to churches learning about new and better ways to do ministry. But church leaders should dig deeper to be sure that tax laws are being followed and/or tax exemption isnt being jeopardized. Here at Church Administrative Professionals we strive to provide churches with accurate, up-to-date information on such issues. Call us.
Please Note: This information is provided with the understanding that Church Administrative Professionals is not rendering professional advice or service.