3 Big Tax Code Changes for Churches
By Raul Rivera
On December 22, 2017, Congress and the President of the United States signed into law the largest tax reform since 1986, called The Tax Cuts and Jobs Act or TCJA. This law went into full effect on January 1, 2018.
The new tax law addresses many different changes to the tax codes for for-profit companies, nonprofit organizations, and individuals.
Part of this new tax code reduces the tax on companies, limits the estate tax, and increases deductions for individuals.
As 2018 crosses the halfway point in the year, there have been many questions about everything that the new tax law contains and how some of the new changes pertain to running a nonprofit, such as a church or ministry.
There are several tax changes in the new tax law that speak directly to how nonprofits and charitable donations should be handled.
Tax Change 1: Unrelated Business Income Tax
This new tax law changes the rate that Unrelated Business Income Tax or UBIT is calculated. Before explaining the change, it is important to understand what UBIT is and if it applies to your church or ministry.
If your church or ministry runs a business outside the normal hours of your church, you may be subject to UBIT. Let me explain.
Let’s say your church runs a bookstore that is only open on Sunday before and after service. This bookstore sells a few books and T-shirts, and it is only used by your parishioners. This type of business is not subject to UBIT.
Now let’s say that your church is next to large park with athletic fields. Every Saturday, your church rents its parking lot out to the city’s parks and recreation office to use for overflow parking.
The income that is made from renting out the parking lot is subject to be taxed, but the income made from your bookstore is not subject to be taxed. This is because the income made from from renting out the parking lot is unrelated to the church’s charitable mission.
Now let’s say that your church also has a large gym that it rents out to people to hold events in. Before January 1, 2018, a church or ministry could combine all the money made from its various activities and only pay tax on the profit the church made.
With the new tax code, that cannot be done. Each profitable activity will have to pay UBIT on its own.
Before January 2018, if the parking lot had to be repaved, then that expense could have been taken on the combined profit made by both the gym rental and the parking lot rental. Now, each individual profitable venture has to pay tax.
Even with these new tax regulations, finding a way to make money for your church is important.
At StartCHURCH, we fully believe that having a for-profit arm is a great way to fund activities for your church. It can bring more jobs to your community, generate profit that can be used for your church and its activities, and because it is a separate entity from your church, it holds it’s own liability.
At the end of the day, a church-owned business allows for your church to bring its values and mission to people who may never step inside of a church building. A for-profit arm allows for you to interact with people in their daily lives in a way that isn’t intrusive.
Click here to read more about starting your own for-profit arm!
Start Your Church Owned Business Today!Tax Change 2: Tax on certain fringe benefits
According to the IRS, a fringe benefit is a form of pay (including property, services, cash, or cash equivalent) in addition to stated pay for the performance of services.
These benefits could include free parking or bus passes, memberships to a gym, use of the church’s daycare, etc.
The idea around a fringe benefit is that because of where you work, you get something for free as a part of your total compensation package.
Up until this new tax law, these benefits were not taxed, just seen as a perk of working for the church or a nonprofit.
After January 1, 2018, these benefits can be taxed 21%. What does that mean?
That means that if, for instance, you work for the your church and as a staff member, you get to use the church gym for free, then the church could be taxed because you are taking advantage of this fringe benefit.
The problem is how to determine what a taxable fringe benefit is and how much these benefits should be taxed.
The gym example may seem straight forward, but what about this one?
The pastor has a reserved spot in the parking deck acrocss the street from a church in downtown Atlanta, that the church pays for. According to the new tax law, the church would have to pay UBIT on that spot.
Should the church be forced to pay tax on certain fringe benefits? If so, how should that tax be determined?
Tax Change 3: A change on how donations can be deducted
As in the past, the new tax law continues to support giving charitable contributions, either monetary or by donating items.
This new law enables people to be able to take a larger deduction on their taxes at the end of the year. They now can deduct up to 60% of their adjusted gross income, an increase of 10%!
In 2017, 70% of the people who took a charitable contributions deduction took a standard deduction.
Now that people can give larger donation amounts, it is the perfect time to make sure your church can accept them! Over 3.1 billion dollars has already been raised this year through online giving.
StartSITES, StartCHURCH’s new website creator, allows you to create a website in less than hour and set up online giving with a few clicks of the mouse.
Be able to tell your story and collect donations all at once! Make it easy for people to support the vision.
Start Receiving Online Giving Today
Many questions still left unanswered
There are a lot of questions floating around as this tax law is discussed. The Tax Cuts and Jobs Act is new, and there are a lot of details that have not been fully examined.
Some churches and nonprofits are looking at tax bills in the tens of thousands of dollars because they provide their employees with fringe benefits.
A lot of churches and nonprofits are fighting this new tax law, saying that they cannot pay the same salary that a for-profit business can, but they can provide fringe benefits that make them attractive to job seekers.
More are just confused about what is taxable, what isn’t, and how to put a price on a fringe benefit, like a reserved parking space.
Due to the controversy that this new tax law has created, new legislation has been introduced to Congress to repeal certain parts of the current, new tax law, including the taxation of fringe benefits.
If you are interested about reading more about this new tax law, I recommend reading Does the Tax Reform Affect Minister’s Taxes?