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?
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.