Even before the pandemic, many churches had gaps in their budget that they hoped to close with income from other sources. That might include investing in the stock market, launching a coffee shop, having a food booth at the State Fair, or renting out their parking lot or building. The good news is that creative funding will not put your 501(c)(3) tax-exempt status at risk.
Usually these activities won’t cause you any trouble with the IRS. It’s possible that your church may have to pay Unrelated Business Income Tax (UBIT) which is 21% of the business income. UBIT might be worth a future post. Here’s what may cause your church to lose its 501(c)(3) status:
Supporting a Political Candidate
A church can encourage people to vote and to be informed and even handout voter guides, but the church should not endorse or oppose a political candidate. If a pastor wants to make a political statement, they should make it clear that they are not speaking on behalf of the church.
Churches are often passionate about supporting or condemning potential legislation. When does this passion become excessive? There is a link below from the IRS that provides some guidance. Long story short, churches shouldn’t spend over 20% of their budget on lobbying. In my experience, most churches rarely spend more than even $100 on trying to influence legislation so this likely not a big concern.
Enriching Its Members
This is more than just thinking you’re paying your pastor and staff too much. Is your church issuing “dividends” to members? Does your church pay your pastor a percentage of the offering? Those are the kind of weird things the IRS is looking for.
While the 501(c)(3) status only pertains to being exempt from Federal Income Tax, what about other taxes…sales, property, payroll? In one of my very first posts, I asked “Are churches tax exempt?” That article is linked below.
- Post on Tax Status of Churches: http://jctaccounting.com/2019/11/28/are-churches-tax-exempt/
- IRS 501c3 Exemption Requirements: https://www.irs.gov/charities-non-profits/charitable-organizations/exemption-requirements-501c3-organizations
- IRS Guidance to Churches: https://www.irs.gov/charities-non-profits/churches-integrated-auxiliaries-and-conventions-or-associations-of-churches
- IRS Lobbying Test: https://www.irs.gov/charities-non-profits/measuring-lobbying-activity-expenditure-test
- Tax Adviser’s Guidance on UBIT: https://www.thetaxadviser.com/issues/2021/jun/unrelated-business-activity-substantial-tax-exempt-organizations.html