September 20, 2016

Coffee Shop as an "Integrated Auxiliary" of a Church

Question:

A church helped start a coffee shop which is a separate entity from the church. The primary goal of the coffee shop is to donate the profits to the church. Individuals have donated equipment to the church to establish the business. Can the donors claim charitable contribution deductions for the equipment?

Answer: 

Donors of non-cash gifts maybe be entitled to write-offs and should refer to IRS Publication 526 for further details regarding possible deductions.

The question brings up greater concerns than whether the donors can deduct contributions. For example:
  • Who takes responsibility for any legal compliance or liability concerns?
  • Does the ministry hold a Seller's Permit from the State in which it operates?
  • Is the ministry complying with all IRS and State employment laws for withholding taxes and other regulations?
  • Who is responsible for income taxes on profit, if it happens to fall under the classification as Unrelated Business Income?
Internal Revenue Service Publication 526 includes auxiliaries in the list of qualified organizations to receive deductible contributions. But according to IRS Publication 1828 in order for the coffee shop to be named as a integrated auxiliary it must meet these requirements: 
  • be described both as an IRC Section 501(c)(3) charitable organization and as a public charity under IRC Sections 509(a)(1), (2) or (3);
  • be affiliated with a church or convention or association of churches; 
  • and receive financial support primarily from internal church sources as opposed to public or governmental sources.
As an example, Publication 1828 notes that "Men’s and women’s organizations, seminaries, mission societies and youth groups that satisfy the first two requirements above are considered integrated auxiliaries whether or not they meet the internal support requirements."

The church leadership should pursue the assistance of professionals to help navigate these matters.

For more detailed information regarding integrated auxiliaries, see Code of Regulations, 26 CFR Section 1.6033-2(h).

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