Depreciating a New Church Building and Reporting Rental Income

Question 1:

A church recently purchased a church building. Is the church required to begin depreciating the building?

Answer 1:

If a church uses full Generally Accepted Accounting Principles (GAAP) for its books, then fixed assets must be capitalized and depreciated. However, in many situations, it is our belief that many churches (especially small churches without accounting personnel) are best served by using the modified cash basis. This means that capital asset purchases are recorded as expenses, and not as depreciable assets. Expensing asset purchases allows the church’s congregation to more easily understand the financial situation of the church. This concept of expensing assets is discussed at greater length in the following blog posts:

Church Accounting for Fixed Assets
Churches Recording Depreciation

For a MS-PowerPoint presentation on financial management for a church, follow the link provided below to MinistryCPA.org and click on Presentation: Church and Christian Ministry Financial Management download.

Church and Christian Ministry Financial Management

Question 2:

The building purchased by the church in question 1 has current leaseholder occupants. Is the church legally bound to continue those leases? How should this income be reported?

Answer 2:

The continuation of the leases is a matter of the lease contracts. The church should acquire copies of the leases from the seller. Typically, a new landlord will either continue the leases with the current tenants until the leases expire, or negotiate a relocation arrangement with the tenants.

Typically, real estate rental income does not represent taxable, unrelated business income (UBIT). A November 14, 2012, blog posting specifically addresses this issue:

Church Renting Building: Unrelated Business Income Tax

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MinistryCPA - Corey A. Pfaffe, CPA, LLC

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