A loan denial isn’t always bad, especially if it leads you to implement a best practice. According to When the Bank Says No a Your Church blog by Lee Dean, being rejected for a loan request creates an opportunity for your ministry to “pursue another lender, adjust the project, improve its financial situation, or a combination of the three.” One way to improve your financial situation is by assessing your ministry’s cash reserves, an important best practice whether or not you’re trying to get a loan. But getting your reserves where they need to be, your ministry can be in a better position to secure that loan approval sometime down the road.
Donations typically comprise the bulk of the income received by ministries. However, it is normal for churches and religious organizations to conduct other activities, such as summer or winter camps, men’s and women’s retreats or the sale of religious books. As long as these activities are directly related to the organization’s purpose, there are no issues related to taxes or tax reporting. However, the organization can cross the line when activities are not a substantial part of the organization’s exempt purpose.
Activities conducted by churches and religious organizations will be subject to the unrelated business income tax (UBIT) if all three of the following conditions are met:
- The activity constitutes a trade or business
- The trade or business is regularly carried on
- The trade or business is not substantially related to the organization’s exempt purpose. (The fact that the organization uses the income to further its charitable or religious purposes does not make the activity substantially related to its exempt purposes.)
It is important that every organization review these conditions for all the activities in which it engages where “other” income is generated. Just because income is generated does not mean taxes are due. It is also important to understand that nonprofit organizations are permitted to generate unrelated business income; they are just required to report it and pay the related taxes using IRS form 990-T.
Even if an activity meets the above three criteria, the income may not be subject to tax if it meets one of the following exceptions:
- Substantially all of the work in operating the trade or business is performed by volunteers
- The activity is conducted by the organization primarily for the convenience of its members
- The trade or business involves the selling of merchandise substantially all of which was donated
In general, rents from real property, royalties, capital gains, and interest and dividends are not subject to the unrelated business income tax unless financed with borrowed money.
Some great resources on the topic include:
- IRS Publication 595 – Tax on Unrelated Business Income for Exempt Organizations
- EFCA Website and Publications
For questions about your specific situation, please seek legal, accounting or other professional advice.
A blog post by Sheri Laninga entitled Financial Review at Church? suggests that financial reviews should be conducted even if your ministry finances are in good shape and that financial accountability is important for maintaining a code of honor in the church.
What are some questions you ask in conducting your ministry’s financial review?
In the normal course of ministry, many nonprofit organizations—as well as missionaries and other individuals—maintain foreign bank and financial accounts. If you own or have authority over a foreign account (such as a bank account, brokerage account, mutual fund, or unit trust), read on. You may be required to report the account yearly to the Internal Revenue Service.
Under the Bank Secrecy Act, you must file a Report of Foreign Bank and Financial Accounts (FBAR), if:
- You have a financial interest in, or signature authority (or other authority that is comparable to signature authority) over one or more accounts in a foreign country and
- The aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.
The FBAR is required because foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions. It is a tool to help the United States government identify people who may be using foreign financial accounts to circumvent United States law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad. Any citizen, resident, or domestic corporation of the U.S. must file the FBAR annually with the IRS on or before June 30 of the following year.
It goes without saying (but I’m going to say it anyway) that ECCU strongly encourages our members to comply with these rules. Not reporting foreign accounts to the IRS carries both civil and criminal penalties. Remember, reporting is designed to detect and curtail illegal activity of criminals. Ministries and individuals conducting legitimate ministry and personal activities should not worry about reporting these accounts.
For more specific information on the FBAR, see the IRS website.
It’s been said that to know where you’re going, you have to know where you’ve been. This proves true according to a recent blog post by Rev. Margaret Marcuson, who says that understanding your church’s financial present requires looking at its financial past. How do you start making that archaeological dig? In Ten Tips for Understanding Your Church’s Money Story, Marcuson talks about how to get started.
What method are you using to better understand your church’s financial story?