19 Mar 2020

How Your Church Can Generate Income

Founder Raul Rivera

I am sure that the dreams you have for your church are much bigger than your church’s checkbook. This is the case for many, if not all, pastors across the country. As a result, many pastors will look for other avenues from which the church can generate additional income.

This might be done through activities such as:  

  • Running a church bookstore or coffee shop,
  • By selling ads in the church bulletin, on the church website, or in other church materials, and
  • Renting out church property and facilities.

These are all great ways for churches to generate additional income to help carry out their mission, but such activities may be considered an unrelated business and the income generated from those activities are subject to an unrelated business income tax.

Let me explain.

The type of Form 990 churches are not exempt from

When your church earns $1,000 or more in gross income from an unrelated business activity, then your church must file Form 990-TFailure to file this form can result in some hefty fines and penalties.

Before we discuss some of the specifics of Form 990-T, I would like to help you understand what is considered as unrelated business activity.

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What is an unrelated trade or business?

To understand what an unrelated trade or business is, we have to look at three sections of the tax code: sections 511, 512, and 513.

  • Section 511 imposes a tax on income to an organization that is derived from an activity that is not related to its tax-exempt purpose.
  • Section 512 defines the term “unrelated business taxable income” as any gross income derived from an unrelated business activity that is regularly carried on by an organization.
  • Section 513 defines the term “unrelated trade of business” as “any trade or business the conduct of which is not substantially related… to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501.”

In short, these three sections tell us that prior to an activity of your church being considered an unrelated business activity and the income derived from such activity being considered taxable, the following three conditions must be met:

  • The activity must be considered a trade or business.
  • The trade or business must be regularly carried on.
  • The trade or business must not be substantially related to the exempt purpose of your church.

Exceptions to unrelated trade or business activities

As you become more familiar with what is considered an unrelated trade or business, you may be thinking of certain activities your church is already conducting. 

Perhaps your church has a bookstore or coffee shop. Maybe your church operates a thrift shop from an extra room in your church, and you are beginning to question whether this particular activity would be considered an unrelated trade or business. 

Well, even if an activity meets the above mentioned criteria of an unrelated trade or business, if any one of the following three exceptions is met according to section 513(a), that activity will not be considered an unrelated trade or business. The three exceptions are as follows:

  1. Substantially all the work in operating the trade or business is performed by unpaid volunteers.
  2. The activity conducted by your church is conducted primarily for the benefit of your members.
  3. The trade or business being conducted involves the selling of merchandise, substantially all of which has been received by your church as gifts or donations.

If you are still unsure if your activities require your church or ministry to file Form 990-T, I encourage you to give our specialists a call at 877-494-4655. We are more than happy to provide you with the answers you need to have peace of mind.

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Additional exceptions to be aware of

Now we know what constitutes an activity considered as unrelated trade or business, and we have examined three exceptions that negate an activity being considered an unrelated trade or business. In addition to these three exceptions, there are also some forms of income that are excluded from being considered unrelated business taxable income. 

Some types of income that are excluded from unrelated business taxable income include

  • Dividends,
  • Interest,
  • Annuities, 
  • Other investment income,
  • Royalties, and
  • Rent from real property, e.g., buildings and land. (Rental income from personal property is not excluded.)

You can read more about how the IRS views income derived from renting church property in this blog.

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Filing Form 990-T

As previously mentioned, when a tax-exempt organization, including churches, derive income from an unrelated trade or business, then it must file an income tax return using Form 990-T. Keep in mind that filing Form 990-T is only required if your church receives $1,000 or more in gross income from an unrelated trade or business. 

Like other Form 990s, Form 990-T must be filed no later than the fifteenth day of the fifth month of your church’s fiscal year. In most instances, this date will be May 15. However, if, for instance, your church’s fiscal year happens to begin on July 1 and end on June 30, then your Form 990-T would be due no later than November 15.

If you anticipate that your church’s unrelated business income tax liability for the year is going to be $500 or more, then you will need to use Form 990-W to calculate estimated taxes to be paid in quarterly installments. If your church’s fiscal year is aligned with the calendar year, then your quarterly estimated payments should be made by April 15, June 15, September 15, and December 15.

According to the instructions of Form 990-W, failure to pay the estimated tax when due may result in an underpayment penalty for the period of the underpayment. If your church ends up overpaying its estimated unrelated business income tax, then you may apply for a “quick refund” using Form 4466 if your overpayment is a least 10% of your estimated income tax liability for the year, and it is at least $500.

Making too much money from unrelated business activities

While I applaud ingenuity and thinking “outside of the box” when it comes to generating income to further the kingdom of God, I encourage you to proceed with caution regarding your church’s current, or possibly future, unrelated business activities. I say this because when the IRS considers your unrelated business activity and income, the IRS weighs them against your church’s tax-exempt activities and total annual income. 

If your church’s unrelated trade or business constitutes more than an “insubstantial” part of its activities, then your church’s tax-exempt status will be in jeopardy of being revoked.

Rather than taking this risk, the best answer to this potential problem for your church is to start a for-profit arm. In short, a for-profit arm is a business venture of which your church is the majority shareholder. In return, the for-profit arm pays the church profits in the form of tax-free dividends.

If you have questions about your church structure and church compliance, then please give us a call at 877-494-4655. You can also click the button below to have a specialist call you. One of our team members will be happy to help!

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Please feel free to comment. We always appreciate good dialogue. However, we do moderate each comment to ensure that it is on topic and not derogatory to other participants. We ask that you keep your comments brief and pertinent to the topic so that others may benefit.

Blessings,
Raul Rivera


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