Saturday, July 7, 2018

Hey Fletch … We charge outside groups to use our facility. Some are concerned at our church that we should be paying tax on this income. They want us to not host any outside group for this reason. Thoughts? 

DRF—There are certain situations where churches have to pay what is called Unrelated Business Income Tax (UBIT). As for UBIT, here is what the IRS says:

For most organizations, unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption. An exempt organization that has $1,000 or more of gross income from an unrelated business must file Form 990-T. An organization must pay estimated tax if it expects its tax for the year to be $500 or more. 

The first question to answer is the outside group fulfilling your churches charitable, educational or religious vision? Many times the answer to this question is “yes” and no UBIT is required. For example, if you allow another church to use your auditorium, that aligns with the purpose of your church—preaching the gospel. 

Consider though if you lease one hundred parking spaces to a local business. Let’s say that the business pays $1,000 a month for those spaces. That lease is unrelated to the purpose of your church. You will have to pay tax on the income, less expenses for maintenance, insurance and other items. In leasing parking spaces, you are acting like a for-profit business and need to pay tax on the net profit.

Food for thought. Bon Appetit.