Unrelated Business Income May Have Tax Implications
Many congregations earn extra income by renting their facilities to outside groups. But is there a point at which such income might jeopardize a congregation’s tax exempt status? And what about renting to for-profit groups?
The Rev. Ralph Mero, the Unitarian Universalist Association’s (UUA’s) Director of Church Staff Finances, frequently fields these types of questions. Here’s how he responds:
Churches can rent their facilities and pay no taxes on the revenue unless the income constitutes a “substantial” percentage of the congregation’s total income, says Mero. The IRS has not defined what substantial means, he notes, but most accountants feel that income that exceeds 20 to 25 percent of the organization’s total revenues should be declared as unrelated business income and could be taxable in some cases. He recommends consulting a local tax specialist about particular situations.
Churches can rent to non-profit or for-profit individuals or groups. One case where rental income might jeopardize the church’s tax exempt status is if the church has borrowed money to remodel all or part of its facility for the purpose of renting it. The revenue from rentals then becomes subject to income tax as unrelated business income. The rental income from cell phone antennas on church property can also sometimes be large enough to require payment of taxes.
Income from renting church parking lots is treated separately by the IRS from building rentals and is more likely to qualify as unrelated business income. The Community Church of Chapel Hill, NC (330 members), rents about 80 parking spaces to employees at the University of North Carolina, says congregation president Gayle Ruedi. “We do keep track of that money separately and we pay taxes on it.” She said total rental income at the church amounts to about 15 percent of total revenue and the parking lot revenue is about half of all rental income.
Congregations should carry comprehensive property, casualty, and liability insurance to protect themselves against lawsuits from someone who might be injured at a rental event. “Trip and fall” are the most common incidents that result in legal actions, says Mero. Many Unitarian Universalist congregations use Church Mutual, (800) 554-2642.
If a church operates a commercial enterprise not related to its basic religious purpose, that could cause the local taxing authority to question its eligibility for property tax exemption. Example: a church that rents a wing of a building for full-time use by a real estate firm would likely have to pay property taxes on that wing.
First Parish in Bedford, MA (326 members), has had a cell tower in its steeple since 1998. Richard Daugherty, a member of the physical plant committee, says the tower revenue is about 10 percent of the congregation’s operating budget. The money goes into the church’s operating fund and also into an endowment that is available, in part, for social action projects.
From time to time there is talk that the income should be taxed, he says, and he believes that at some point the congregation may make a donation to the city in lieu of taxes. In addition, the congregation tries to use much of the income for social justice activities. “This is money that was handed to us and we’re trying to hand part of it to someone else.”
Mero suggests that congregations buy a copy of the Church and Clergy Tax Guide by Richard Hammar, published annually in January by Christian Ministry Resources, P.O. Box 2301 , Matthews, NC 28106, or call (800) 222-1840. The book is $17.95 plus $4 shipping and handling. Mero says it is widely used by congregations in many denominations.
Also, obtain a copy of IRS publication 598 available through the IRS website and see the IRS Tax Guide for Churches and Other Religious Organizations, publication 1828.
For other answers to many church-related financial questions, go to the Office of Church Staff Finances.