Church Day Care

[quicksam]

Local Church wants to open a daycare. All profits will go into the general fund of the church.

Does the church need to get a new Federal ID number and set up a new non profit corp for the daycare or will it be ok to work under the veil of the church?

Would a tax return need to be filed for the daycare since the church does not have to file one?

Thanks for all your help.

Lester

p.s. The church is not my client, but they asked for my advice. Thanks again.

[Bees Knees]

The Day Care would more than likely be considered an Unrelated Trade or Business of the Church, subject to UBIT tax on Form 990-T.

The instructions for Form 990-T say the following:

Unrelated trade or business income.
Unrelated trade or business income is the
gross income derived from any trade or
business (defined on page 3) that is
regularly carried on, and not substantially
related to (defined on page 3), the
organization’s exempt purpose or function
(aside from the organization’s need for
income or funds or the use it makes of the
profits).

Trade or business. A trade or business
is any activity carried on for the
production of income from selling goods
or performing services….

Not substantially related to. Not
substantially related to means that the
activity that produces the income does
not contribute importantly to the exempt
purposes of the organization, other than
the need for funds, etc. Whether an
activity contributes importantly depends in
each case on the facts involved.

The question then is this: How does a Day Care activity carry on the exempt purpose of a Church, other than to raise revenue for the Church? Merely raising revenue is not enough. The Day Care activity itself has to be connected to the exempt purposes of the Church.

Maybe the Day Care activity provides free Day Care for poor people in the community. Or maybe the Day Care provides religious instruction for the children. These could be considered activities that help to carry on the exempt purpose of the Church. Simply running a Day Care to raise money, however, is not, and thus would be subject to income tax like any other trade or business.