Skip to main content

Threat to Tax-Exempt Status? Using Facilities for Profit

Question:

Can a church member conduct piano lessons in her church's auditorium without threatening the loss of the congregation's tax-exempt status?

Answer:

Our answer comes from Matthew Davis, J.D., former attorney with the nationally recognized Christian Law Association, who currently practices law in Wisconsin, Illinois, and Florida.

"As a tax-exempt entity, churches must be careful not only in what activities they engage in directly, but also in how they allow the facilities to be used.

"The primary way in which this can come up relates to the requirement for tax-exempt status that the ministry's activities must relate to its exempt purpose. Assuming the church's exempt purposes are 'religious, charitable, and educational,' (three of the purposes specifically mentioned in the Internal Revenue Code 501(c)(3)), piano lessons would certainly fit within that expectation as 'educational' and therefore not be a problem on the tax-exempt purpose issue, even if tuition is charged for the lessons. The same principle applies for a Christian school operating in a church building.

"The next potential issue relates to use of the building. Some questions have arisen in recent years about circumstances in which churches could be a considered a 'public accommodation' and required to allow outsiders to use their buildings - presumably outsiders that would use the building for uses the church would not agree with. The argument goes something like, 'Well you allowed this outsider to use the building for piano lessons, so now you have to let us have our wedding in your church.' To protect against this very remote possibility, I generally advise churches to avoid "outside rentals" to non-members. This simple rule protects the church from any argument that it is a public accommodation. In the present question, the piano lesson provider is not an outsider, so the public accommodation question is not at risk.

"Finally, the issue of private inurement should be considered. Church assets cannot be used by private individuals for personal use or private gain without compensating the church appropriately. For example, I once heard of a situation where a church staff member started a dog washing business on the side using the church's baptistry (believe it or not!). Other examples involve using church vehicles for private benefit, using church facilities, etc.

"In order to maintain its tax-exempt status, the church must avoid private inurement which the IRS defines generally as, 'an individual receives a personal, non-compensatory benefit from use of a tax-exempt organization's assets' (IRS Publication 557). In this case, the use of the piano and facility to give piano lessons does raise the issue of private inurement if fair market rental value is not paid in exchange for the use.

"An arrangement can and should be made with the lesson provider to compensate the church for the use of the facility. Other arrangements could also be made to avoid this private inurement issue, such as bringing the lessons 'in-house' for the church to offer the lessons in its own name and 'hire' the lesson provider to give the lessons. An accountant should be consulted to help with the determination of fair market rental value and other advisable options."




Comments

Popular posts from this blog

Review: Form 1099 Payments to 501(c)(3) Organizations

Question: A church rented space from another church last year. Should it request a completed Form W-9 and issue Form 1099-MISC? Answer: Payments from one 501(c)(3) organization to another 501(c)(3) organization are not subject to Form 1099-MISC reporting. The IRS Instructions for Form 1099-MISC state that "payments to a tax-exempt organization" are exempt from reporting a Form 1099-MISC.  The following are typical examples of payments of $600 or more by a church which are subject to reporting a Form 1099-MISC: Rent paid to an individual (non-corporation) Payments for services rendered by individuals who are not employees (e.g. janitorial service, facilities, snow removal, guest speakers) Support sent directly to missionaries

Special Topic: U.S. Olympic Champion Ben Peterson's Autobiography "Road to Gold"

Road to Gold , by Ben Peterson We are privileged to serve our client Ben Peterson and Camp of Champs, the wrestling ministry he founded   and directs. Ben wrestled for more than 16 years, coached on a collegiate level for 28  years, and has directed Camp of Champs for more than 40 years. We have read his autobiography and found Ben's dedication to the sport and his faith to be inspiring. If you are looking for a good story we highly recommend Ben's  Road to Gold. In Road to Gold , Ben shares the lessons he learned throughout his upbringing and how they led him to achieve Olympic victory. Ben states a key element of his youth was the consistency of his parents. He was encouraged to read the Bible every day from an early age, which he now describes as the most stabilizing habit in his life. Throughout his story Ben also emphasizes the importance of confidence, solid goals, hard work, and consistency. These qualities helped Ben throughout his life and wrestling career, from learni

When you don't know what you don't know

Here at MinistryCPA, we recognize that many churches rely on volunteers and/or part-time treasurers and financial secretaries.  With this in mind, we seek to come alongside ministries in providing the much-needed support to ensure that they are operating in a manner that is both compliant with governing authorities and taking advantage of opportunities for improved stewardship of ministry and employer financial resources.  Please consider this brief checklist to determine if your ministry needs to look further into areas that could be classified as “We don’t know if we are compliant.” Please check all compliance requirements that are currently being met: File quarterly Form 941 or annual Form 944 with the IRS Issue Forms W-2 to all employees and File Forms W-2/ W-3 with SSA Ministerial Housing Allowance is only listed in box 14 of the Form W-2 – it is not included in box 1 Obtain Form W-9 from all individuals/businesses that are paid the cumulative total of $600 or more in the year f