In accordance with Internal Revenue Code Section 105, amounts received by employees under employer accident and health plans are excluded from Gross Income. This rule is also communicated by the IRS in its Publication 15-B (2008), Employer's Tax Guide to Fringe Benefits. Relative to churches and Christian ministries, the typical lone exception to this rule applies when the employer has established a "self-insured medical reimbursement plan that favors highly compensated employees." These plans typically reimburse employees for medical expenses not covered by insurance. For a church with a pastor as its sole employee, these rules are not applicable. Publication 15-B provides concise, understandable explanations of these rules.
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...
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