Unrelated Business Income
Have you ever had a blessing in your ministry that quickly turned into a challenge? Financial blessings in the form of unrelated business income may be such a challenge for your church. The IRS calls any income that comes from a “non-church” purpose—like proceeds from a coffee shop or income from rental property—Unrelated Business Income (UBI). The IRS generally looks at three questions to determine if your additional income falls into the UBI tax category:
- Did the income come from a trade or business? Although most churches receive donations, some may also receive income from the sale of goods or services. Transactions made from these sales may be treated as UBI and subject to taxation.
- Is the church or ministry regularly engaged in this trade or business? A good way for churches to answer this question would be to determine if the church’s involvement in that particular business is equal to or less than that of a secular business. If it is an ongoing business, then it is most likely considered unrelated business income. For example, a property that is leased continually or a gift shop that is maintained year-round is determined by the IRS as a regularly-engaged business.
- Is the activity unrelated to the organization’s exempt purpose? An activity must be substantially related to the church’s tax-exempt purpose in order to remain tax-free. This issue may be difficult to answer. In fact, many ministries have seen litigation arise from this question. A ministry must demonstrate that the activities further a purpose for which the organization is exempt, such as preaching, teaching, or evangelism.
Avoid UBI Tax Penalties
Determining whether or not your ministry’s endeavors fall into the UBI category is often complicated. If the wrong designation is made, it can be costly. It is important to consult with an attorney to make sure your ministry is properly determining and designating its unrelated business income. Our experienced team of attorneys at The Church Lawyers can help you tackle this difficult but important subject. Our law firm is called to invest our careers in helping churches, ministries, and Christian schools like yours. We know church law and are prepared to help you as you lead your ministry. Contact us today—we look forward to serving you!