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August 30, 2011

One Church Receives an Unexpected Tax Bill

Why churches must understand unrelated business income.

 by Matt Branaugh and Michelle Dowell


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A church in Mount Vernon, Washington, thought it didn’t owe taxes. But that changed after a recent state audit, when the state said the church owed $180,000 in back taxes and penalties, according to a TV news station.

The church charges admission to a small amusement center. All profits support the church’s ministry. Previously, the church thought that since these admission fees supported the ministry, taxes were not owed. The state’s department of revenue disagreed, although it lowered the amount owed to $58,000 after reviewing the case and waived all penalties and interest if the church can commit to paying.

The church is now racing to raise the money, hoping the community and members can help cover the costs.

Michael Batts provides a comprehensive, easy-to-understand analysis of how unrelated business income, and the possible taxes owed from it, works for churches in a recent Church Law & Tax Report article (now offered as a download). In part of the article, he explains:

Unrelated business activities in a church may include:
  • Operating a public restaurant;
  • Operating a revenue-generating parking lot;
  • Selling non-religious items in a bookstore (such as computers, cosmetics, and popular secular books);
  • Providing administrative services to other unrelated organizations for a fee;
  • Conducting travel tours that are not adequately religious or educational in nature; or
  • Selling advertising in the church's newsletter.
A church is permitted to conduct an insubstantial amount of unrelated business activity. If a church engages in a substantial amount of unrelated business activity, the church could lose its tax-exempt status under Section 501( c )(3) of the Internal Revenue Code.

Besides useful analysis, Michael includes numerous hypothetical examples from church situations to illustrate how different rules do—or don't—apply. Nearly every church will benefit from the insights offered in Does Your Church Owe Taxes on Alternative Revenue?

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Posted by Michelle Dowell on August 30, 2011 8:00 AM

Related Tags: contributions, donations, finance, IRS, money, receipts, tax

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