Skip to main content

Church Sales of Music Tapes

Question 1:

A church choir produces and sells a Christmas CD, the proceeds offsetting the cost of making the CD and contributing to its music ministry budget. Will the sales be subject to sales tax?

Answer 1:

Sales taxes are collected by most states, so the law must be considered for the location of each church. Since I'm in Wisconsin, I'll share its law.

According to the State of Wisconsin, Department of Revenue, Publication 206, churches may make such sales without collecting and submitting sales tax to the state authorities if the Occasional Sales Rules apply. In Wisconsin, as long as the church does not otherwise hold a Seller's Permit and, as noted above, the sales receipts are not event admission fees, then the church will not be subject to sales tax collection and payment if it satisfies Wisconsin's definition of "not engaged in a trade or business." Only if a church makes sales of greater than $25,000 in a calendar year and makes sales on more than 20 days will it be considered "engaged in a trade or business" in Wisconsin.

It is important that each church study its local law.

Question 2:

Will these sales be subject to federal unrelated business income tax?

Answer 2:

According to IRS Publication 598, "unrelated business income is the income from a trade or business regularly carried on by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity" (my emphases).

The Publication continues, "business activities of an exempt organization ordinarily are considered regularly carried on if they show a frequency and continuity, and are pursued in a manner similar to comparable commercial activities of nonexempt organizations."

Further, "a business activity is not substantially related to an organization's exempt purpose if it does not contribute importantly to accomplishing that purpose (other than through the production of funds). Whether an activity contributes importantly depends in each case on the facts involved."

Each church must weigh its own situation, but the occasional production and sale of church music (not "regularly carried on") for the legitimate purpose of putting church music in the hands (and hearts) of people ("substantially related to an organization's exempt purpose") could very well present a defensible position for not classifying the above "profits" as unrelated business income.

Comments

Popular posts from this blog

Church Car Purchase for Pastor

Question: A church would like to purchase a car for the pastor's use. What is the best method to accomplish this goal? Should the car be titled in the pastor's name? What will be the tax consequences of this arrangement? Answer: The church has two main alternatives for this purchase:  Title the car in the pastor's name and reimburse him for business expenses Title it in the church's name and treat personal use as taxable compensation There are fewer immediate tax consequences for the latter. Since both are viable options, we will discuss both situations in this post. If the church chooses to give the car to the pastor and register it in his name, he is free to use it for whatever personal use he desires with no tax consequences. However, the fair value of the car is taxable as compensation at the time it is given to the pastor. Internal Revenue Code section 102(c) clearly states that gifts given to employees by their employers are taxable compensation. The...

Can Form 4361 be filed after the deadline?

Question:   Is it possible to opt out of Social Security after the 2-year deadline? Answer:  Unlike other employees, a licensed or ordained minister has the option to opt out of Social Security and Medicare (FICA). If a minister wants to opt out they must file Form 4361 by the tax deadline including extension, in the second year in which they have received ministerial income of $400 or more. This election is final, and the minister cannot opt back into FICA taxes.  At MinistryCPA, we have received questions from ministers who have exceeded the two year deadline and desire to opt-out. There have been several court cases which provide guidance in answering this question. Some have argued that the minister was unaware of the deadline, had mistakenly believed they had filed a timely election, were given incorrect advice by an IRS employee, or their opposition to participate in Social Security and Medicare did not arise until after the 2-year deadline had passed. In each of th...

Form 941 or 944 - Which Should a Church Use for Payroll Reporting?

Question:   Are churches required to file a Form 944 annually to report their employees' earnings and tax-withholdings? A quarterly Form 941 (rather than an annual Form 944) is required of some employers. Which IRS form, if any, should be filed? Answer: According to IRS Section 1402(c) and 3121(c), ministers are not subject to mandatory income tax withholding. Unless one or more ministerial employees request non-mandatory withholding, church employers with only ministerial employees do not need to file Form 941 or Form 944.  The IRS  Ministers Audit Techniques Guide  explains in further detail a minister's treatments for Social Security, Medicare tax, and income tax withholding.   Form 941 or 944 must be filed when non-ministerial employees are compensated or when ministers request withholding. When can a church file the annual Form 944 rather than filing Form 941 each quarter? The IRS may permit the annual filing of Form 944 for employers wh...