Wednesday, December 12, 2018
Hey Fletch … We are in an unusual place. Many times new churches rent or lease space from public school systems. Our county school system is seeking to lease classroom space from us to house a portion of their alternative school program, many of whom have disciplinary issues. We desire to be good neighbors and have an ideal small Sunday School space. Our Trustees only want to charge for “reasonable cost recovery.” Would the income received likely be UBIT or would the fact that it comes from a government agency negate UBIT? Would allowing a government entity use/lease our facility make us as a facility a “public community center” denying us the freedom to say “No” to other community organizations whom we might not be in agreement with philosophically or theologically? We recently revised our by-laws to avoid such requests.
DRF—You have raised so many issues! You will need to think about UBIT. That may not be an issue if you only recover utilities and janitorial costs. The criteria laid out by 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.
There may special circumstances in renting a room to a school or non-profit, as you mentioned.
You should carefully consider the criteria for renting out the room. How will this decision impact future room rentals. Will you take all comers? Other school districts? Other non-profits?
Another issue is liability insurance. Who will be liable if a child is hurt on your property or sexually molested by a teacher or visitor?
This case is so complex, let me ask Michael Martin from the Evangelical Council for Financial Accountability to comment.
Michael—David is right on the UBIT issue. There is a threshold question of whether there would be any income subject to tax if you’re simply trying to recover costs in renting the space.
Keep in mind, you also have to reach a $1,000 gross income threshold before you face UBIT reporting requirements with the Form 990-T. Another important consideration is whether the property you’re renting is debt-financed. Rental income is generally excluded from UBIT, unless the property is debt-financed.
These are just a few general UBIT considerations. Within the rules, there are exceptions—and exceptions to exceptions! So it will be very important to reach out to your organization’s professional tax counsel for advice based on the specifics of your situation. In the meantime, I recommend IRS Publication 598 if you’re interested in reading up more on the UBIT rules before seeking professional advice.
Finally, I commend you for taking a careful look at your bylaws and church policies with the help of groups like Alliance Defending Freedom. They would be in a better position to address your public accommodations question and how this scenario might interact with the bylaws and policies you’ve adopted.