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How do Churches handle Unrelated Business Income?
by Darrell Mims
The good news is that Churches and religious organizations can produce income from sources that are unrelated to their tax-exempt purposes.  This income must not be a substantial part of the overall organization’s activities.   The bad news is that your ministry will have to pay taxes on that unrelated business income.  Churches and other exempt organization that receive income from an unrelated trade or businesses are required to file Internal Revenue Service Form 990-T, Exempt Organization Business Income Tax Return.  This form is required if the income is $1,000 or more in the taxable year.  If your church has a separate Employer Identification Number (EIN), then Form 990-T is due the 15th day of the 5th month following the end of the church’s tax year.
  The conditions that determine if incomes from unrelated trade or business activities are subject to this tax must meet the following three criteria:
  • The activity is really a trade or business.
  • The trade or business activities are consistently operating.
  • The particular trade or business is not substantially related to the organization’s exempt purpose.
There are several exceptions to the criteria listed above.   The income may not be subject to the tax if one of the following applies to the income-producing activity:
  • Volunteers are performing the work in the business or trade.
  • The business or trade is conducted by the ministry for the primary convenience of its attendees or members.
  • Merchandise that has been sold that was donated to the ministry.

Let’s provide you with several examples of income that is subject to the tax. 

1) If your church is receiving rental income from real estate or personal property that has outstanding debt, then the ministry is subject to the tax.  If the real or personal property is not financed with loaned money, then the income is not subject to the tax.  There is one exception to this rule concerning the income derived from the rental of debt-financed land within 15 years of acquisition. 

2) The sale of merchandise or publications if it does not have a substantial relationship to the exempt purposes of the organization. 

3) The sale of advertisements in the ministries publications or other written or verbal forms of public communications.   Examples of media where advertisements are used by the church include web-sites, bulletins, magazines and journals.  

4) The income derived from the use of a church owned parking lot is subject to the tax.  If the church charged parking to church attendees or members, then the income would not be subject to the tax.  It would only pay taxes on income from operating the parking lot for fees charged to the general public.  This type of income would not be considered substantially related to the church exempt purpose.

I am available to visit your ministry and conduct an evaluation to determine an action plan to ensure your church meet compliance and stewardship standards.This visit will be tailored to your church’s requirements to evaluate areas that need attention. I will also provide a detailed plan to resolve any findings. Your staff may need training to ensure they are meeting reporting timetables, compliance issues and safeguarding the church assets.
Go to Contact Us to send an email to schedule your On-Site Consultation.
Consulting Fee based on church size and needs.