Non Profit

[Bonnie]

If a non profit ( a Church) has a day care operating within the church and also owns apartment buildings that produce an income, how does this get reported? Would there be 3 tax returns? Also if the church is allowing someone to live in one of the apartments free of charge is this then income to that person and how is this reported?

Thanks
Bonnie

[BOB W]

To the best ......

..... of my knowledge the Day Care and rental income would be "unrelated business income", taxable.

[Koss]

Ubit

>>Would there be 3 tax returns?<<

No. The church is a single business entity. It can only file one tax return. All income is reported on one tax return.

The church may have unrelated business income. This type of income is reported in a special section of the tax return, and may be subject to income tax. The basic concept is that the church may be engaged in business activities that are not really related to its religious purpose as a nonprofit organization. But you may be able to take the position that the business activitities are directly related to the religious functions of the organization. It depends on the individual facts and circumstances. You'll need a lot more information.

>>Also if the church is allowing someone to live in one of the apartments free of charge is this then income to that person and how is this reported?<<

It may or may not be income, depending on the facts and circumstances. The key question is: Is the person who is living in the apartment providing any goods or services to the church in exchange for living in the apartment? If so, you're looking at a barter transaction, and you will need to compare the fair market value of the rent with the fair market value of the goods or services provided to the church.

If the church is allowing the guy to live in the apartment for free, and getting absolutely nothing in return, then that sounds like a simple act of charity on the part of the church. On a theoretical level, it's no different than someone living in a homeless shelter, or someone who receives free meals at a soup kitchen. This would not be taxable income to the person. It is treated as a gift from the organization to the individual.

However, unlike the cost of food purchased by a soup kitchen, the fair market value of the rent in this scenario would not be treated as an expense for the church. The fact that the church "gave away" the apartment as a gift is accounted for by the fact that the church does not report rental income for that unit.

Church returns are almost a specialty practice... this stuff can get really complicated really fast. And small, independent churches that have grown rapidly often have a board, treasurer, or pastor that makes business decisions without consulting an accountant or attorney first. And then they are surprised when there are unintended consequences.

This is particularly like to happen if the church grows rapidly, or if the church suddenly receives a large donation or inheritance.

Burton M. Koss

[outwest]

Welcome to the strange...

and wonderful world of the Form 990. The first thing to know is that the return is due 5 months after year end and an extension is available. This is a summer project after the rush.

Second, you'll generally be doing one return with a 990-T schedule for unrelated business income.

Do a little reading on this but you may want a specialist. Churches are not normally required to file a 990 but this changes the situation in ways I'm not clear on off the top of my head.

Doug