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.