Skip to main content

Private Inurement

Question:

A church houses a Bible school on its property that had been started at one time by a church employee as a for profit, sole-proprietorship. Church staff state that "the church is non-profit and the school is for profit." Does the church need to prepare tax returns each year for the school? Can it merge the school into the church after-the-fact so it won't be a sole proprietorship any more?

Answer:

There's a lot going on in these questions. As I try to be in all most posts, I'll try to be brief yet helpful. Some of the issues will undoubtedly require consultation with an attorney who knows state law applicable to the church.

Certainly, a church can have ministry related auxiliary activities such as a Bible school that will be tax exempt. But the church must be the "owner" of the venture.

For now, the church needs to very careful about having its property used by an employee to operate his own for-profit business, especially if he’s not paying a fair market value rent for its use. The Internal Revenue Code cautions tax-exempt organizations to avoid “private inurement” -- when an individual receives a personal, non-compensatory benefit from use of a tax-exempt organization’s assets.

On the other hand, if the school is truly a ministry owned by the church, then it may not actually be properly classified as “for profit.” While its receipts may exceed its disbursements in some years it will not likely incur a tax liability. Publication 598—Tax on Unrelated Business Income of Exempt Organizations—should be consulted.

Comments

Popular posts from this blog

Housing Allowance when Bartering for Rent Payments

Question:

If a minister rents his principal residence, but he performs services (mowing the lawn, repairing the roof, etc.) in lieu of rent, can he still qualify the rent amount for a housing allowance tax benefit?

Answer:

Of course, bartering income is taxable. The Internal Revenue Code interprets that above situation as follows: tenant/minister receives taxable income for the fair market value of the services he provides, andtenant/minster pays landlord for renal of residence. The minister in this case reports taxable income for services provided in lieu of rent. It is also likely subject to self-employment tax. He may then claim as qualifying housing allowance expense equal to the amount he "pays" for rent of his personal residence. Essentially, there is no difference than if the minister and his landlord simply traded checks.

See a past MinistryCPA post regarding this topic: http://ministrycpa.blogspot.com/2016/09/services-to-church-in-lieu-of-rent-of.html

Mission Trips Involving Both Charitable and Personal Time

Question:

A church group went on a two-week mission trip, and a few of the members stayed an additional two weeks for personal time. Will the members who stayed the two additional weeks be able to deduct expenses from the trip?

Answer:

IRS Pub 526 covers the topic of Charitable Contributions and, more specifically, travel expenses associated with charitable trips. The publication states that travel expenses will be deductible “if there is no significant element of personal pleasure, recreation, or vacation in the travel.” The publication also states, “The deduction for travel expenses won't be denied simply because you enjoy providing services to the charitable organization. Even if you enjoy the trip, you can take a charitable contribution deduction for your travel expenses if you are on duty in a genuine and substantial sense throughout the trip. However, if you have only nominal duties, or if for significant parts of the trip you don't have any duties, you can't deduct you…

403(b) Contribution Calculations Exclude Housing Allowance

Question:

Should 403(b) contributions and the subsequent match be based on the pastor's total income from the church (including housing allowance) or just from the salary minus housing allowance?

Answer:

According to Richard R. Hammar, J.D., LL.M., CPA, in his book 2015 Church & Clergy Tax Guide, “Section 107 of the tax code specifies that a minister’s housing allowance (or the annual rental value of a parsonage) is not included in the minister’s gross income for income tax reporting purposes. Therefore, it would appear that the definition of includible compensation for purposes of computing the limit on annual additions to a 403(b) plan would not include the portion of a minister’s housing allowance that is excludable from gross income." 

Hammar's Church Law and Tax Report is an excellent resource that many ministries should consider as annual subscribers.