Many churches ignore or do not understand what unrelated business income is. 

Very often one of our church clients will call us concerned that they have received unrelated business income.  The vast majority of the calls are concerned with the sale of an asset or the rental of their facilities.  After giving me the details of what they have done they usually ask,  “Are we going to lose our tax exemption?”

In most cases the answer to this question is no because the purpose of the unrelated business income tax is not to punish exempt organizations who engage in unrelated activities.  The main purpose is to simply collect taxes!  Unless an unrelated activity becomes so large that it is the dominant activity a charity is engaged in, tax exempt status is safe.

The best way to understand the rules is to look closely at the words unrelated and business.  Unrelated means activities not directly connected with a church’s defined mission or purpose.  So, in the case of casual sales of property, the church has definitely received some “unrelated” income.  But, we need to look at the second word, “business”.  This word implies that an activity is regularly carried on.  In other words, the church is holding itself out as operating a business on an ongoing basis.  Very few churches generate this type of income.  A few examples are restaurants that are open to the public and parking lot and garage fees. 

Rents, by definition are NOT considered unrelated business income, unless the church happens to be renting a facility that was purchased with a mortgage.  Even then, there are a myriad of loopholes that may allow the church to escape taxation.

But, even if a church does generate unrelated business income, there is nothing to worry about unless the activity dwarfs the church’s main exempt purpose.  The tax code is simply trying to level the competitive playing field.  If a church is entering the market place, it should have to pay taxes just like its competitors.