May 7, 2013
Q&A: Are Proceeds From the Church Community Center Taxable?
A prime outreach opportunity raises financial, tax considerations.
Q: Our church's new community center includes a gym, and a coffee shop for people to fellowship and drink coffee while watching their younger children on our playground just outside the building. We also host a church basketball league involving other churches. All the fees from the basketball league and funds from the sale of coffee will be used to pay for supplies, electricity, janitorial supplies, and so on, for the events we plan. All money goes right back into our ministry for which the building is intended--to reach non-Christian families in a recreational environment.Here are my questions:
- Do we owe taxes in any way?
- How are payments for referees handled? Contract or payroll? Cash or check?
- Can we use waiver of liability forms for referees and/or players?
It does not matter for tax purposes how the funds are spent. The only thing that matters for taxes is the transaction where the church received the funds. Churches may operate youth athletic leagues within its exempt purposes, so all the fees received from operating the leagues are exempt from federal income taxes. If the church allows another entity to operate the leagues, then the proceeds will likely be taxable.
Normally, the sale of coffee during church activities does not create taxable income for federal income taxes.
Referees sent from the local referee association and paid according to the association rules are contract labor. But if the church hires the referees, they are employees.
State tax issues are entirely a different matter. The operation of the athletic leagues and/or coffee shop may jeopardize the church's property tax exemption. Sales taxes may be due on the sale of coffee or other items. You will need to check with local taxing officials.
The use of waivers is advisable. You will need a local attorney to draft such as waiver.
Go deeper on unrelated business income in Chapter 12 of Richard Hammar's 2013 Church & Clergy Tax Guide , in Does Your Church Owe Taxes on Alternative Revenue? , a Feature Report from Church Law & Tax Report, and in Understanding Unrelated Business Income, a downloadable training resource for church staffs from Church Law & Tax Report.
Christianity Today's Church Law & Tax Group also recently partnered with Brotherhood Mutual Insurance Company on a comprehensive study of outreach efforts and risk management plans by churches. A free executive report is available.