Skip to main content

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

Comments

Popular posts from this blog

Rental of a Church Parsonage to a Non-Minister

Question: A church owns a parsonage, but the pastor does not use it as he owns his own home. The church rents the parsonage to a tenant other than a minister or employee of the church. Will the church be responsible for paying income tax on these monies as Unrelated Business Income (filing a Form 990-T) even if the money is used to carry on the business of the church? Answer: Whether the money is used for church purposes is irrelevant.  IRS Publication 598  states: "If an exempt organization regularly carries on a trade or business not substantially related to its exempt purpose, except that it provides funds to carry out that purpose, the organization is subject to tax on its income from that unrelated trade or business." Fortunately, in the case of rental income from real property, such income is "excluded in computing unrelated business taxable income" (Publication 598). Caution: see content below regarding debt-financed property.  However, a second concern not a...

How can my ministry expenses be covered by the church?

     How can my ministry expenses be covered?                            Many ministers use their personal autos for ministry purposes. Their employers can reimburse these costs using a standard mileage rate published by the IRS. The per mile rate represents employees’ entire reimbursable cost other than highway tolls and parking tabs. If not covered by use of the ministries’ credit card, other costs can be reimbursed as well—business and travel meals, lodging, office supplies, and professional library purchases among them. Some ministries reimburse travel costs using per-diems published by the IRS. If employee business expenses are not reimbursed, the personal tax deduction benefit to the individual minister is severely limited. Non-taxable reimbursements after documentation is provided to the employer follows IRS rules for accountable plans. Non-taxable cash advances before expenses are in...

What is the best retirement account for a Minister?

       What are my options for retirement savings?                  Regardless of options, start now! You probably have learned about traditional and Roth IRAs. We have often found them well short of the benefits we will share here regarding Internal Revenue Code section 403(b) plans. These plans must be established by your employer (although you might need to be the initiator). They are funded in two ways—withholding from your paycheck at your option (called “elective deferrals”) and as initiated by the employer (matching or non-elective contributions). These contributions not only save income tax, but they also reduce the income you must report as subject to the 15.3% SECA tax. Further, at retirement with the cooperation of your church or Christian ministry the distributions to you can be tax-free to the extent of your qualified housing expenses. Many ministries also adopt what are often called “FICA alternative” be...