Tax Reform Implications for Churches and Ministries

By Raul Rivera

By now we should all be aware that the tax reform Congress passed in December 2017 has affected our individual tax liabilities.

Some changes, such as reductions to the income tax brackets, have already gone into full effect, while other changes won’t be noticed until we file our taxes next year.

But what implications might the new tax reform have on churches and ministries?

As a matter of fact, did you know that the new tax reform made a change that could potentially affect your church’s tax-exempt status?

This particular change could increase tax liability to churches and ministries, and it could even jeopardize your church’s tax-exempt status.

In today’s blog, I will share with you what this change is and what you can do to prevent it from adversely affecting your church.

Implications of tax reform on churches and ministries

To fully understand the implications of the new tax reform on churches and ministries, we must first recognize that there are certain things that can jeopardize your organization’s tax-exempt status.

One such thing that can jeopardize your church’s tax-exempt status is unrelated business income.

Unrelated business income (UBI) is revenue your church generates from activities that are regularly carried on and that are not substantially related to your tax-exempt purpose. (See Internal Revenue Code sections 511, 512, and 513.)

Such activities may include operating a bookstore or coffee shop, advertising activity, and the renting of church facilities and/or property.

(Related blog: “Should Your Church Rent its Facilities to Another Church?”)

In short, in order for the income from an activity to be considered UBI, three conditions must be met:

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

So what does unrelated business income have to do with the new tax reform? I’ll answer that next.

Tax reform makes changes to unrelated business income

As we have seen, unrelated business income has to do with income-generating activities that regularly occur and are not substantially related to your church’s tax-exempt status. The key phrase here being income-generating.

Under the new tax reform, however, unrelated business now includes certain fringe benefits such as transportation benefits, parking benefits, and on-site athletic facilities.

That’s right. The new tax reform is now subjecting certain employer expenses to unrelated business income.

Beginning this year (2018), unrelated business income of a tax-exempt organizations will include the value of any qualified transportation fringe benefit provided on a pre-tax basis to employees.

This includes buses, transit passes, parking passes and reimbursements.

As a result of this change, if your church wants to continue to provide these benefits on a tax-free basis to its employees, then your church will be required to report the value of such benefits as unrelated business income.

If you wish to continue providing such benefits to your employees but do not wish to pay unrelated business income tax, you may do so; however, this benefit then becomes a taxable fringe benefit to employees and should be treated as increased income.

While this specific change to unrelated business income won’t affect every church or ministry, it is something that all churches and ministries must be mindful of.

While the new tax reform has made certain fringe benefits taxable as unrelated business income, it has also made changes that only strengthen a strategy that churches and ministries can use to their advantage.

Tax reform makes now the best time for churches to start a business

Yes, you read that correctly, and I’ll explain.

When the new tax reform passed, one of the changes made was to the corporate tax rate. The new tax reform changed the corporate tax rate from 35% to 21%.

This change directly affects unrelated business income since the corporate tax rate is used to calculate unrelated business income tax.

But why risk your church’s tax-exempt status through unrelated business income?

Instead, use that activity and ingenuity to work for the benefit of your church and not against your church by starting a church-owned business - aka for-profit arm.

In short, a for-profit arm is a business venture of which your church is a majority shareholder. In return, the for-profit arm pays the church profits in the form of tax-free dividends.

This is actually a strategy that we teach to pastors and church leaders at our conferences all across the country.

If you would like to learn more about this strategy for your church, then I invite you to join us at one of our upcoming conferences, or you can click on the link below to find out more information.

If you have questions about the new tax reform or anything about your church’s legal structure, then give us a call at 877-494-4655. One of our team members will be happy to help!

Recommended blogs for you:

• “No Offering, No Problem”
• “How to Start a Church the Right Way”
• “Does the Tax Reform Affect Ministers’ Taxes?”

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