Churches provide tremendous value to their surrounding communities, and beyond, in the outreach activities they undertake. It’s a truism that human beings derive benefit both materially and spiritually from charitable exchange—both in the giving and in the receiving. In its outreach, it is imperative that a church create guidelines to direct the sort of charitable giving that may occur. This will be based mainly on who may receive the benefits of such outreach.
Every election season, churches find themselves caught in the midst of questions about what is permissible when it comes to political candidates. The current tax law limits what a church may do if it wants to maintain its tax-exempt status. In short, churches must not endorse or oppose candidates for public office if they wish to avoid endangering their tax-exempt status.
As nonprofit organizations, churches are not in it for the money—though of course, they must bring in funds in order to perform their operations, to secure places of worship, to pay their employees, and so forth. Still, they don’t have “shareholders” in the sense that standard corporations do. And therefore the standard of care and the duties those running the church (the elder board, deacon board, or other governing body—also called “directors” of the corporation) must adhere to are different in kind. For their part, church directors have a fiduciary duty to the church itself, which means that a church director must act in the best interest of the church, taking care to stick to its mission—and this means, in turn, that they cannot act in their own self-interest to the church’s detriment.
The tax-exempt status granted to churches by law is fundamentally designed such that its benefits are essentially funneled to the churches themselves. If an individual receives too much benefit from a transaction with the church—in the form of payment by the church for products, property, or services that goes well beyond market value—particularly if that person is somehow linked to the church in one of a number of key ways—then the IRS may choose to impose sometimes severe penalties on the church. That is to say, the only parties that may benefit when a church enters transactions with third parties are the church itself and the third party—and that third party must not be someone who is defined as a “disqualified person.” Any transaction that violates this principle is called an “excess benefit transaction.”
Today, the United States Supreme Court granted review of two cases involving the ministerial exception doctrine. The two cases are the first time the high Court will consider the ministerial exception since it unanimously upheld the doctrine in 2012.
The automatic exemption of churches from taxation is a fundamental right under our national constitution. And while most other forms of charities are required to file IRS form 990 or 990-EZ, churches are exempted even from this requirement. The First Amendment’s granting of freedom of religion has led both the courts and the Internal Revenue Service to have accordingly adopted a “hands off” approach to church taxation.
I joined the United States Army out of stubbornness and to prove a point. (Kids, do not follow my example on this.)
One of my favorite cousins had previously joined the Army. I overheard my mother and aunt laughing at the idea of “Miss Ann” joining the force. Until that point I had never had any desire to join the military. But I tell you—that laughter struck a chord, and I became determined to have the last laugh.
One common aspect of church life is the creation of new works. Ministers write sermons to deliver at worship services. Choral and worship directors and employees compose musical pieces and arrangements for performance at services. Sunday school plans and lessons are composed. Audio-visual projects are created. Art is crafted. Books are written. These things are usually considered intellectual property by the law.
The question becomes: who owns all of this output?
The First Amendment to the US Constitution guarantees religious freedom to churches. From colonial times and since the creation of the very first tax code, churches have always been exempt from federal income taxes. This is part of the guarantee of religious freedom. After all, what the government can tax, it can control and even ultimately destroy. That’s why the federal Tax Code contains an automatic exemption for churches as public charities. Churches also enjoy numerous other favorable benefits such as special rules in place to limit audits, and even state and local tax exemptions.
When a church receives a financial benefit in the form of business income, a number of perhaps unexpected challenges can crop up—particularly with regard to taxes. According to the IRS, income that issues from a source that is not considered to match the purpose of a church is classified differently than exempt income pulled in by church-purpose activities. Such Unrelated Business Income—which may come from coffeehouse proceeds, from the renting of church property, or from other such forms of activity—can be taxed despite an organization’s tax-exempt status, particularly when it exceeds $1000. In this case, the organization is required to file a Form 990-T, and must also pay estimated tax when the tax amount for the year is expected to break the $500 limit.