FAQ on Property Tax for Churches Hosting Homeschool Programs

FAQ on Property Tax for Churches Hosting Homeschool Programs

By Carol Topp, CPA         HomeschoolCPA.com

Last update April 5, 2019

For a easy-to-print pdf version click here.

Many homeschool groups use churches for their educational programs. These groups are grateful to the churches for allowing homeschoolers to use their building, sometimes without charging rent.

But some homeschool programs are organized and operate as for-profit businesses and that could threaten the church’s property tax exemption. Churches are granted property tax exemption by their states for conducting religious activities or worship services. In most states, a church cannot let their building be used for activities with a “view to profit” or for “pecuniary gain” (gain of monetary value) or the church could lose part or all of its property tax exemption.

 

Here are some frequently asked questions about property tax, churches and homeschool groups.

If my homeschool group is a nonprofit organization, can we use the church building?

Yes, probably. Nonprofits, especially those with a religious purpose, do not have a “view to profit” or engage in activities for “pecuniary gain,” (those phrases are used in several state statues regarding property tax exemption) so they may use church property without posing a threat to the church’s property tax exemption.

What if my business doesn’t make a profit?

The property tax exemption is based on the use of an exempt property (i.e., the church building) by a for-profit business. Exemption is not based on the profitability of the business entity using the church’s property.

If I don’t make a profit from my business, I’m a nonprofit then, right?

No. An organization is only a nonprofit if it is organized (with a board, bylaws, etc.) and operated (with a religious, educational, or charitable purpose) as a nonprofit. What you are is an unprofitable business, but not a nonprofit organization.

I’m not a business; we’re just a bunch of moms gathered together to educate our children.

If you received money and in return offered a service (such as educational classes), then you are operating a business. You are not “just a bunch of moms.”

What if my business doesn’t pay rent to the church?

It is commonly assumed that if a church does not charge rent to a for-profit business, then no income tax would be owed by the church. That is usually correct and refers to unrelated business income tax (UBIT). No income, therefore no income tax to pay.

But income tax and property tax are two separate taxes. The property tax exemption is based on use of the church’s real and personal property, not on any income the church receives from rental activities. Therefore, the fact that a church is generous and does not charge rent to the business owner using the church building, does not change the fact that the church’s property tax exemption is at stake.

Renting out space could incur unrelated business income tax (UBIT). The IRS assesses UBIT on churches and all 501(c)(3) tax exempt nonprofits if they receive income from conducting a business unrelated to the church’s religious purpose. If a church rents space to a for-profit business, the church is conducting a business and may be required to pay UBIT. There are several exceptions to UBIT, so the church should discuss the issue with their CPA.

What if my business gives a love offering or donation to the church?

Calling what you give to the church a “donation” or “love offering” is a simply renaming the payment. Calling your payment a donation does not change the fact that you are giving money to the church in exchange for use of its space. Even if the church does not bill you, it is payment for use of space and not a donation. Be honest. Call it what it is: rent.

Attorney and CPA, Frank Sommerville, says

“Many churches try to disguise rents by using other terminology or by claiming that the other organization is simply giving a donation to the church. Other times the church calls it a “cleanup fee” or tells the tenant to pay the janitor directly for his services. None of these name games work. If any amount is paid by the other organization to the church or the church’s workers, then the IRS and state taxing authorities will likely treat it as rent paid to the church.”

Source:  https://www.wkpz.com/content/files/Use%20of%20Church%20Facilities%20by%20Outside%20Groups.pdf

Will the church lose its 501(c)(3) tax exempt status for hosting a for-profit business?

The church has 501(c)(3) tax exempt status as a religious organization and probably also charitable and educational purposes as well. As long as the church’s activities are exclusively religious, charitable, and/or educational, their 501(c)(3) status is not in jeopardy. But two other issues need to be considered: inurement and unrelated business income tax (UBIT).

The church could lose its 501(c)(3) tax exempt status if they practice inurement. Inurement means “benefit” and includes the transfer or use of property to insiders for less than fair market value. The IRS forbids a 501(c)(3) tax exempt organization to use its income or assets to directly or indirectly benefit an individual, a person with a close relationship with the organization, or a person who is able to exercise significant control over the organization. These “insiders” can be board members or donors and would also include the pastor, leaders, elders, deacons, trustees, and staff and their family members.

Here’s the IRS definition of inurement:

A section 501(c)(3) organization must not be organized or operated for the benefit of private interests, such as the creator or the creator’s family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization.

Source: https://www.irs.gov/charities-non-profits/charitable-organizations/inurement-private-benefit-charitable-organizations

For example, the spouse of a pastor operating his or her for-profit business on the church’s property could threaten the church’s 501(c)(3) tax exempt status because the church may be guilty of inurement.

Inurement is a very serious matter and the IRS has revoked the 501(c)(3) tax exempt status from churches for practicing inurement.

Renting space is a commercial activity and not a religious, charitable or educational activity. So the IRS considers income from renting space as “unrelated business income” and will charge an unrelated business income tax (UBIT) on the profits from the rented space.

Property tax and unrelated business income tax are two separate taxes. Property tax is determined by state laws and administered by local county government. It is an ad valorem tax, meaning based on value. An ad valorem tax is based on the assessed value of an item such as real estate or personal property.

UBIT is determined and administered by the IRS at the federal level. It is a tax based on income, specifically business income unrelated to the exempt purpose of the tax exempt entity. Most churches strive to avoid UBIT and many have policies prohibiting for-profit businesses to rent or use the church’s property to avoid UBIT.

My business has a religious purpose. I’m a Christian, we pray before classes and quote Bible verses. So I fit the religious purposes of the church, right?

Having a religious faith or conducting religious activities such as prayer, Bible teaching, etc. does not mean your business has an exempt religious purpose. As a business, your purpose is to make a profit. Many state statues regarding property tax exemption are specific on what type of entities can claim the religious exemption.

What if the church knows I’m operating a for-profit business and doesn’t mind or doesn’t care?

It is quite rare for a church to knowingly allow a for-profit business use their facilities. The church is putting itself at risk of losing part or all of its property tax exemption. The church may be ignorant of their state’s prohibition against using their tax-exempt property to conduct for-profit activities. Or you may have misrepresented the true nature of your business. Or you may have spoken with a pastor and not the church’s business administrator or board of trustees, who are more aware of the legal and financial matters of the church.

What if my homeschool program is a nonprofit but I hire my teachers/tutors as Independent Contractors? (added April 5, 2019)

Many small nonprofits desire to avoid the hassles of employees and payroll, but hiring workers who provide the key activity of the nonprofit’s purpose (education in the case of a homeschool program), means that these individuals are still conducting their for-profit businesses on the church’s property. That could still threaten the church’s property tax exemption. An educational nonprofit should treat workers (i.e., teachers or tutors) providing the key activity of their nonprofit (education) as employees.

Other workers such as a website designer or outside bookkeeper, who do not provide the primary or key services of the nonprofit, can be treated as Independent Contractor without threatening the church’s property tax exemption.

What if my business is an LLC (Limited Liability Company)?

A single-member LLC taxed as a sole proprietorship is still a for-profit business. If you regularly conduct your for-profit business on the church’s property, it could threaten the church’s property tax exemption.

Isn’t it the responsibility of the church to ask if my homeschool program is a for-profit business?

It is quite unusual for a church to let a for-profit business use their facilities, so they may not have even thought of asking. The church may be ignorant of their state’s prohibition again using their tax-exempt property to conduct for-profit activities. Additionally, you may have misrepresented yourself as “just a bunch of moms” or as a homeschool groups and not disclosed the for-profit nature of the business. You bear responsibility for disclosing the true nature of your business to the church.,

My church houses a bookstore/coffee shop/Weight Watchers, etc.? How is that legal but my homeschool business program is not?

These examples may be for-profit businesses operating in a church and may threaten the property tax exemption of the church. Alternately, the church may be paying property tax on the portion of the building being used by the businesses (if their state allows partial nonexempt use).

How do I know what my state laws say about property tax exemption for churches?

Do an internet search on property tax exemption and your state. Or search this pdf file (466 pages long) from The Civic Federation. https://www.civicfed.org/file/4794/download?token=3ifCi8dI. It lists the property tax laws or each state. After you do a search for state laws, call your local county tax assessor. The state sets the laws, but the local assessor applies the law to specific situations. Ask the assessor about business use of a church’s building affecting property tax exemption.

Our church pastor/deacon/elder’s spouse is the business owner. Is that a problem?

It could be. The church’s 501(c)(3) status makes them exempt from federal income tax and usually state income tax as well. Hosting a for-profit business does not typically threaten the church’s 501(c)(3) tax exempt status, but if the for-profit business is owned by a church “insider” or family member of an insider, the church could be guilty of inurement and that may threaten their 501(c)(3) status. Prohibited inurement includes the transfer or use of property to insiders for less than fair market value.

Aren’t the churches making a big fuss over nothing?

Maybe not. Read this story about a church in Miami, FL that was assessed a $7.1 million dollar property tax bill for conducting a for-profit school on their church property.

https://www.miamiherald.com/news/business/real-estate-news/article222993435.html?fbclid=IwAR2Ehjdp7kYjJQFeJHipP_wBKMXhJfc3U33vi0SNwwBMkqtzudi_dSryE9g

The facts in this case are different from most homeschool programs, but a tax assessor can levy a tax lien against a church for conducting a for-profit business (in this case a Christian school) on the church’s property.

What should I do if I am the business owner?

  • Become informed about the limits on business activities conducted by churches in your state’s property tax exemption laws. This document may help you start your research:https://www.civicfed.org/file/4794/download?token=3ifCi8dIThis pdf file is 466 pages and lists the state statuses for every state. Then do an internet search “YOUR STATE nonprofit property tax exemption” or “YOUR STATE church property tax exemption.”
  • Call the government agency responsible for assessing property tax. In most states that is your local county property tax assessor. In other states, it may be the state department of revenue.  Ask the person with the knowledge and authority to assess property tax, “Can a church let a for-profit business use the church’s building on a regular basis without harming our property tax exemption?” Ask for an assessment to be conducted and an estimate of the property tax to be calculated. Request a written report of their findings and opinion, especially of the county tax assessor declares there is “no problem.” Determine if your business can afford to pay the property tax bill. (expanded to clarify the proper agency to contact on April 5, 2019)
  • Talk to your host church about this issue. Ask what they know about limits on business activity for churches in your state.
  • Consider looking for a location that is not a church or other property tax exempt nonprofit organization.
  • Consider converting your business to a nonprofit organization with a religious and educational purpose. That involves forming a board to operate the program, drafting bylaws, etc. It takes time and money, but then the nonprofit organization could use the church’s space without being concerned about threatening the church’s property tax exemption.
  • Seek competent legal advice on your business’ use of church property regarding property tax exemption, UBIT, and inurement.

What should I do if I am a church leader/pastor/elder, etc.?

  • Call the government agency responsible for assessing property tax. In most states that is your local county property tax assessor. In other states it may be the state department of revenue. Ask the person with the knowledge and authority to assess property tax, “Can a church let a for-profit business use the church’s building on a regular basis without harming the church’s property tax exemption?” Ask for a written assessment to be conducted and an estimate of the property tax to be calculated. Request a written report of their findings and opinion, especially of the county tax assessor declares there is “no problem.” (expanded to clarify the proper agency to contact on April 5, 2019)
  • Cease offering space to for-profit businesses. Draft a policy prohibiting the use of the church’s property by for-profit businesses on a regular, continual basis.
  • Continue being generous, especially to nonprofit homeschool groups.
  • Explain to the business owner that she can convert her for-profit business to a nonprofit organization with a religious and educational purpose. It involves giving up control of her business activities to a board, drafting bylaws, incorporating as a nonprofit with the state, etc. It takes time and money, but then the nonprofit organization could use the church’s space without being concerned about threatening the church’s property tax exemption.
  • Ask anyone desiring to use the church’s space if they are a nonprofit organization and perhaps ask for bylaws, Articles of Nonprofit Incorporation, or the IRS 501(c)(3) determination letter as proof of their nonprofit status and religious purpose.
  • Seek competent legal advice on use of your church’s property regarding property tax exemption, UBIT, and inurement.

 

 

 

What is Unrelated Business Income or UBIT?

 

A nonprofit group may raise a lot of money from fund raising. These fundraisers could be so successful the leaders may wonder if the homeschool group owes anything to the government in taxes. For the most part, fund raising is not considered part of your nonprofit group’s mission; it is just a means to the end. After all, your group’s mission is to encourage homeschooling, not to sell ads, pizza or other products.

The Internal Revenue Service calls the money a homeschool group or any nonprofit raises from a fundraiser “Unrelated Business Income,” meaning it is money collected in a trade or business that is not related to your primary mission (or what the IRS calls your “exempt purpose”).

In this short podcast episode (13 minutes)  Carol Topp, the HomeschoolCPA, will explain the 4 exceptions to UBIT:

 

Do you have more questions about conducting fundraisers? My book Money Management in a Homeschool Organization can help.

  • Does your homeschool group manage their money well?
  • Do you have a budget and know where the money is spent?
  • Do you know how to prevent fraud?

This 115 page book will help you to open a checking account, establish a budget, prevent mistakes and fraud, use software to keep the books, prepare a financial statement, and hire workers. Sample forms and examples of financial statements in clear English are provided.

Money Management in a Homeschool Organization

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Used curriculum sales and taxes

When a homeschool group has a fund raiser like a used curriculum sale or mini-exhibit hall is the income taxable?
Thanks,
Dorothy
Dorothy,
Fundraisers are usually considered unrelated business income, meaning that the fundraiser activities are not related to your organization’s tax exempt purpose. In other words, a homeschool group’s purpose is education, not selling curriculum or hosting an exhibit hall.

 

Unrelated business income is taxable income. It’s called UBIT-unrelated business income tax.

 

From the IRS: Unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption. An exempt organization that has $1,000 or more of gross income from an unrelated business must file Form 990-T (and pay federal income tax).

 

Fortunately, the IRS has several exceptions to paying the UBIT tax:

  • A $1,000 threshold allows that the first $1,000 in gross revenues from an unrelated business will not be taxed.
  • If the fundraiser (or unrelated business) is run by volunteer efforts (i.e., no paid staff) then the proceeds are not taxed.
  • If the fundraiser is not regularly carried on, such as a once-a-year unsed curriculum sale, then the proceeds are not subject to UBIT.
  • If you are selling donated items, like in a garage sale, the income raised is not taxed.

One of these exceptions are bound to apply to most homeschool organizations.

So, while the income from an unrelated business activity may be taxable, in reality, no tax will be paid because one of the exceptions mentioned above applies.

 

Carol Topp, CPA

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Homeschool groups and huge fundraisers can be a bad thing!

Hey Carol –

I have been perusing your site as we are getting ready to start a new homeschool group (breaking off a larger group) in our area. Based on the info I have read, I feel that we identify the most as a 501c7 social group.

We will be offering clubs, fellowship, and field trips as our primary purpose. As a larger homeschool group, we have sold Discount Cards with local businesses/restaurants giving certain discounts to patrons. We sold them for $5 each. This has been a huge fundraiser for the bigger group. One box of cards is $5,000 (not all profit as there is expense from the printing).

My question is if as a new group we could sell these to help with our expenses and if the UBI would be taxable? We definitely want to do things correctly. The sellers would be the members of the group and done voluntarily.

I appreciate any help you can provide. Thanks!

Joyell

Joyell,
Your organization avoids the UBIT tax because the fundraiser is conducted substantially (or in your case, completely) by volunteers.

But you need to be careful that at least 65% of your total income comes from membership dues. Therefore, a maximum of 35% your income can come from fundraisers. Note that this is income, not the net proceeds of your fundraiser.

Something like this:

Your group’s total income = $10,000

Membership dues (this can include field trip income) must be $6,5000 or more (at least 65% of total income)
Fundraiser income cannot be more than $3,500 (max of 35% of total income)

One of the problems with this type of fundraiser is that it brings in so much income (and of course has substantial expenses as well), it can that it can jeopardize your 501(c)(7) tax exempt status because the fundraiser income exceeds 35% of total income.

This may mean that you are no longer tax exempt and will owe taxes on your surplus each year.

IOW, the IRS requires 501(c)(7) social clubs organizations to get most of their funds from members and not from selling products or other fundraisers.

I hope that helps.

Carol Topp CPA

Will a nonprofit owe taxes on income from selling ads?

GirlThrowsMoney
We considering including advertising in our conference brochure. Can we consider this conference (exhibitor) income? Or is it UBI (Unrelated Business Income)?
We are also considering placing advertising in our magazine (and our website). Is this UBI? And how do we track it? And how do we report it? And what percent taxes would we pay on it?
Dorothy in OR
Dear Dorothy,
Advertising revenue is definitely Unrelated Business Income (UBIT) in the eyes of the IRS, because selling ads is not related to your tax exempt purpose (education), but you can avoid paying taxes on the unrelated business income in several ways.

The IRS offers several exceptions to UBI Tax (UBIT):

  1.     A $1,000 threshold allows that the first $1,000 in income from an unrelated business will not be taxed.
  2.     If the fundraiser (or unrelated business) is run substantially by volunteer efforts (i.e., no paid staff) then the proceeds are not taxed.
  3.     If the fundraiser is not regularly carried on, such as a once-a-year spaghetti supper, then the proceeds are not subject to UBIT.
  4.     If you are selling donated items, like in a garage sale, the income raised is not taxed.

I think #1 or #2 will apply to your group, so can get income from advertising without worrying about paying tax on it.

It’s a good idea to create a line item in your record keeping labeled “Advertising Income” so it’s clearly differentiated from other income.

Carol Topp, CPA

Will fundraisers cause a homeschool support group to pay taxes?

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I looked at the description of the 501c(7) Social Club status, and also reviewed your comparison chart between c3 and c7 status. I agree that our homeschool group most closely fit the 501(c)(7) Social Club status.

However, I was wondering if our periodic fundraisers would cause us to be taxed – your chart says on income from other sources.  We hold the fundraisers when our funds from membership are too low to pay the rent and other costs.
Thank you,
Lisa R

 

Lisa,

I’m glad you’ve figured out the differences between 501c3 charity and 501c7 Social club status. It’s important to figure out where your group fits.

You asked if periodic fundraisers would cause you to be taxed. It could be a problem, but not likely.

In general, fundraisers are considered “unrelated income” and nonprofits must pay tax on unrelated income (called Unrelated Business Income Tax, or UBIT).

Fortunately, the IRS offers several ways to avoid the UBIT tax. The exceptions include:

1. If the fundraiser was substantially conducted by volunteers (if no one was paid to run the fundraiser, then the proceeds are not taxed)

2. The fundraiser proceeds under $1,000 is not taxed.

The IRS has more exceptions to UBIT, but one or both of these exceptions to paying unrelated business income tax probably apply to your group.

Additionally, the IRS requires 501c7 Social Clubs to have most of their income come from membership fees (65% or more). You probably saw that on the chart comparing 501c3 to a 501c7 Social Club.

So make sure that your fundraisers stay under 35% of your total income. You said they are periodic and sound as if they are secondary to your membership fees (“We hold the fundraisers when our funds from membership are too low to pay the rent and other costs”).

I hope that helps.

Carol Topp, CPA

Will being an Amazon affiliate cause tax problems for a homeschool group?

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I have a question about affiliate relationships with companies like Amazon. We want to receive the benefits offered by Amazon (and others) by placing a link on our website for members and non members to use when ordering products.

I read through one article on your blog regarding Unrelated Business Income Tax (UBIT). One point in your article refers to exemptions for the tax and I believe we will qualify for at least two:

  • A $1,000 threshold allows that the first $1,000 in profit from an unrelated business will not be taxed.
  • If the fundraiser (or unrelated business) is run by volunteer efforts (i.e., no paid staff) then the proceeds are not taxed.

Do you have anything to add to that article or any others I haven’t seen?  Specifically, should we avoid these types of programs?

I appreciate your insight as well as your being a resource to the homeschool community.

Sincerely,

Jeanne R

 

Jeanne,

Thank you for contacting me and your kind words.

I think you understand Unrelated Business Income Tax (UBIT) and the exemptions quite well.

UBIT is a tax that tax exempt organizations must pay when they earn a profit on activities that are unrelated to their tax exempt purpose. The classic example is that a nonprofit hospital must pay the IRS taxes on profit from their gift store, because running a gift store is not related to the hospitals tax exempt purpose (treating illness).

Most charities qualify for exemption from UBIT and you found two common exemptions.

I think the affiliate program with Amazon is a fine idea.

Have it run by volunteers and you’ll avoid any UBIT.

Carol Topp, CPA

What is Unrelated Business Income Tax?

DollarCloseUp

Sometimes a homeschool group brings in a lot of money from fund raising. These efforts are so successful you may wonder if your group owes anything to the government in taxes. For the most part, fund raising is not considered part of your group’s mission; it is just a means to the end. After all, your group’s mission is to encourage homeschooling, not to sell ads, pizza or other products.

The Internal Revenue Service calls the money you raise “Unrelated Business Income,” meaning it is money collected in a trade or business that is not related to your primary mission. The IRS assess a tax on unrelated business income called the Unrelated Business Income Tax or UBIT. The purpose of this tax is to prevent nonprofit, tax-exempt organizations from having an unfair advantage over the for-profit marketplace.

The best example of unrelated business income is a gift shop in a nonprofit hospital. The income from a gift shop is not related to the hospital’s primary purpose of giving medical treatment, so the profits from the gift shop are taxed.

Your homeschool organization could have unrelated business income if you sell T-shirts, candy bars, entertainment books, candles, pizza coupons and a host of other products or if you make money from ads or Amazon commissions on your website.

Fortunately, the IRS has several exceptions to paying the UBIT tax:

  • A $1,000 threshold allows that the first $1,000 in profit from an unrelated business will not be taxed.
  • If the fundraiser (or unrelated business) is run by volunteer efforts (i.e., no paid staff) then the proceeds are not taxed.
  • If the fundraiser is not regularly carried on, such as a once-a-year spaghetti supper, then the proceeds are not subject to UBIT.
  • If you are selling donated items, like in a garage sale, the income raised is not taxed.

One of these exceptions are bound to apply to most homeschool organizations.

The rules regarding UBIT are complex. You can read more about UBIT in IRS Publication 598 Tax on Unrelated Business Income of Exempt Organizations (https://www.irs.gov/pub/irs-pdf/p598.pdf).

Carol Topp, CPA

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