Church rents out part of church

[oceanlovin'ea]

New client came in and after I finished her return, she asked about the church she is secretary for.
An organization that is funded by government and runs a program to help 16-24 year old people to get their GED is going to rent a conference room in their church. They will pay them $2000.
They are a small church and have never had to file a non-profit tax return. They don't even take in enough funds to cover the expenses of operating the church. Minister does not get any pay. In fact, she has paid some of the expenses herself.

She assumes that this money will make it necessary for them to start filing and she wanted to know how to go about paying in their taxes monthly or quarterly. She wondered if they sent in a percentage for example, 20% or 30% would cover their taxes.

I have never done a church or any non-profit so I need some help.

Linda

[erchess]

Rental by a Non Profit

I can confirm that not only will the Church need to file, it will be taxed on this revenue. I have no idea what the rate would be.

A church that I used to belong to had what they thought was a cool solution to this problem. Outside groups wishing to use the facility were allowed to do so for free but they were asked in writing to make a "love gift" of a particular sum that depended on the number of people, the duration of their stay, and which space or spaces had to be heated or cooled during that time. The amount of the "love gift" was intended to cover all costs and give us a tidy profit. In fact these gifts were the second largest source of income for the church behind its endowment and ahead of denominational support and member giving. I never heard of an organization not paying promptly but if any did then it found that it was not able to return. I questioned the legality of this arrangement but everyone just smiled a smile that said to me "We know it's against the law but we expect to get away with it.". There were then and had been in the past lawyers and Tax Practitioners in the church but as far back as I traced it none had ever served as Trustees which in this denomination are the people who would bear personal financial responsibility should that question arise. The church eventually merged with a larger one and we're in a denomination where the government filings are done at the national level anyway.

[Koss]

Exempt Organization

The tax return for exempt organizations is Form 990.

The IRS instruction book for this return is 79 pages long.

Most churches are not required to file Form 990 if their gross receipts are under $25,000 for the year.

Many churches that do have to file a return qualify to file Form 990-EZ, or Form 990-N, which is an electronic version of the form.

Your client may not have to file Form 990, or Form 990-EZ, or Form 990-N.

Your client may have to file Form 990-T, Exempt Organization Business Income Tax Return. It's a return that is required when a nonprofit has $1000 or more of unrelated business income. This is a technical term which has a very complicated definition. The question is whether the income is unrelated to the principal mission of the nonprofit organization. It's a facts-and-circumstances thing; there is no bright-line test.

Your client probably doesn't have to make estimated payments. Estimated payments are not required unless they expect to have a tax liability of more than $500.

You may want to start by reading Publication 598, Tax on Unrelated Business Income of Exempt Organizations.

Good luck. You're in for a ride, Girl.



BMK

[gkaiseril]

And if the allocated expenses exceed the rental income received, then there is not income to tax. Also, for book purposes they may need to depreciate the portion of the building being rented out.

Even though the GED is an education activity, it is not an activity of most churches. But the church could also establish a non-profit or charitable school activity.

[MAMalody]

The first thing I would do is to look at the incorporating documents of the church. You may find that a broad application of the churches designated purpose would cover this. If it does not the church may have to file a Fom 990T. The church does not have to file a Form 990.

[oceanlovin'ea]

Not for me

I don't think I want to get into this area.

I have done a home owners association a few times. That wasn't too difficult.

I may just refer her to someone else for the churches business.

I am trying to slow down, not take on new areas of taxation.

Thanks for your help, though. I will pass on the information to her and let her take it from there. Maybe I will recommend someone I know would be fair and honest with her.

Linda

[CarolToppCPA]

UBIT on rental income

Koss is on the right track to recommend that the rental income is Unrelated Business Income Tax (UBIT).

My church received rental income from an adjacent building we owned that housed some church staff, a dentist and massage therapist. The rental income from the dentist and therapist was UBIncome, but after expenses (utilities, property tax, depreciation, etc.), the net income was nearly zero, so little, if any, UBIT to pay.

The CPA preparing the church's tax return was very familiar with nonprofit taxes and told me that almost always the expenses exceeded the UBIncome and rarely did she see UBI tax paid. JFYI.

JMHO, but I doubt that GED classes run by a govt agency falls within the church's religious mission. I think the rental income is unrelated business income.

Linda, you are smart to know your limits and when to send a client some where else. I do that a lot and everyone is happier!

[Davc]

Rental of real estate by a 501(c)(3) does not produce UBI unles they're renting "debt financed" property.

[Bees Knees]

Rental of real estate by a 501(c)(3) does not produce UBI unles they're renting "debt financed" property.

Agreed.

IRS Pub 598 says:

Income

Generally, unrelated business income is taxable, but there are exclusions and special rules that must be considered when figuring the income.

Exclusions

The following types of income (and deductions directly connected with the income) are generally excluded when figuring unrelated business taxable income….

Rents. Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. Rents from personal property are not excluded. However, special rules apply to “mixed leases” of both real and personal property.

Exception for rents based on net profit.
The exclusion for rents does not apply if the amount of the rent depends on the income or profits derived by any person from the leased property, other than an amount based on a fixed percentage of the gross receipts or sales.

Exception for income from personal services
Payment for occupying space when personal services are also rendered to the occupant does not constitute rent from real property. Therefore, the exclusion does not apply to transactions such as renting hotel rooms, rooms in boarding houses or tourist homes, and space in parking lots or warehouses.

Other exceptions. This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), or to interest, annuities, royalties and rents received from a controlled corporation…

In other words, if the church is simply renting out a room and not providing any services, the rent is excluded from unrelated business income. Thus, the church does not have to file a return.

[Koss]

Yes, but...

The original post says that the church is going to rent a conference room to another nonprofit, that provides assistance to people who are studying to get a GED high-school equivalency certificate.

That sounds like the group will be using the conference room one day a week, or three days a week, from 6:00 PM to 9:00 PM, or whatever the agreement is.

The church is not renting out a building, or even part of a building. The conference room that they are renting has gotta be furnished...

Doesn't that... arguably... make it... a "mixed lease" of both real and personal property?

And if so, what are the "special rules" that apply to such leases?

Just playing devil's advocate here...



BMK