Your Ministry Dreams and the Checkbook
By Raul Rivera
Your dreams were born in the heart of God. I often speak to pastors with huge dreams that are beyond the reach of language. They know what they heard from the Lord, but do not know how to articulate it. This is where we feel God has put us in a strategic place. Imagine your ministry owning a Chipotle®, or a Chic-fil-a® or a franchise. It is possible to do so and be 100% within the purview of the law in regards to fundraising and profit for the church? The answer is 'yes.' We call it a for-profit arm. In Section 502, the IRS calls it a 'Feeder Corporation' and describes it as a business operated for the primary purpose of carrying on a trade or business for profit, even if the profits are distributed to your church. The church receives the profits in the form of dividends, tax-free. Wow! A dream that is within the law; God is in that
How most churches try to fund the dream
Many churches try to fund the dream by conducting fundraisers but really do not make the type of impact that propels the dream. Imagine with me for a moment. A church in South Carolina attempted to do a fundraiser and someone complained to the police that they were running an illegal operation. A few weeks earlier, they were given a five-year-old car so that they could sell it and make some money with it. After discussing their options, they decided to do a raffle. Anyone could buy a ticket for $2.00 and get a chance to win the vehicle. In the first four days they sold 260 tickets. Then they got a visit from a police officer. He was kind and cordial and asked them to refund everyone, which the church did. They had no idea that something so simple could be illegal. Though this is only an example story, it happens every day. In fact, Article XVII, subsection 7 of South Carolina's constitution prohibits raffles and section 16-19-10 provides a penalty of $1,000.00 and a one-year sentence in prison. Nearly all fifty states have provisions in their books that make raffles illegal. Moreover, all fifty states have laws in the books that govern fundraisers.
Churches do fundraisers all the time
Thousands and thousands of churches every week do some sort of fund raising in order to pay their bills and meet their budgets. Many churches sponsor dinners, sell candies, and conduct bake sales, car washes, and auctions without thinking if there are any legal requirements or consequences. When considering a fundraiser, it is very important that you consider the event and the legal side of the event with equal weight. Do not assume that because other churches are doing a particular fundraiser, that they are doing it legally. When a church violates the law through a fundraiser, the violation usually falls into one of the three categories shown below.
1. State gaming laws
2. Federal unrelated business income
3. Sales tax
This short list is not comprehensive. There are property tax exemptions that may be placed at risk, and registration/licensing issues. Let's take a quick look at the three on the short list.
State gaming laws
The laws of all fifty states address gaming. These are raffles and other games of chance. Many states have a statewide constitutional ban against gaming. Other states have laws that prohibit, limit, or require non-profit organizations and churches special registration and licensing. For example, Georgia allows churches to do a raffle. Subsection 16-12-22.1 says that a bona-fide church that is properly registered can operate a raffle so long as they register the raffle with the county sheriff. In the state of Maryland, a raffle has to be registered with the county, and if done in Baltimore City, it has to register with the city as well. Arizona requires that the church or nonprofit be in existence at least five years. West Virginia and other states require at least one year of existence. While the church I pastored never did a raffle, many churches across America have. Most never even knew they violated the law.
Federal unrelated business income
The IRS is responsible to collect taxes from income that comes to the church as a result of unrelated business. IRS Code sections 511, 512 and 513 govern how and when a fundraiser becomes a taxable unrelated business activity. Section 511 imposes a tax on any income that comes to the church that is not related to its exempt purposes. Section 512 defines taxable unrelated business income as income derived from an unrelated trade or business. Moreover, section 513 defines unrelated business activities as any trade or business the conduct of which is not substantially related to the exercise or performance by such organization of its charitable purposes.
The definition of "unrelated business income "
When you look at a church's fundraising activities from the perspective of the law and the IRS, it is possible that they may be classified as unrelated trade or business. Below are the three criteria that must be met in order for your fundraising activities to be considered unrelated.
1. The activity is for the purpose of producing income: The IRS classifies this as any activity carried on for the production of income from selling goods or performing services. It does not limit the types of things you sell and whether they will help the church.
2. The fundraising activities are regularly carried on: Many churches carry on weekly fundraising activities. It is generally understood that there are two types of activities that a church carries on to raise funds. The first is the activity of selling food, books, CD's, and other products just before, during, and just after the church's worship services. These types of activities are generally deemed to be tax exempt and related to the church. Secondly, there are activities that are outside of the worship service times. For example, one church did weekly fundraisers by selling ethnic foods to the employees of local businesses. These lunches were advertised, presold, and then prepared at the church kitchen every Friday for delivery. According to the IRS, this church's activities are considered regular. On August 14th, 2012 the IRS Charities and Exempt Organizations Unit provided the following guidance. For the purposes of unrelated business income, an activity is "regularly carried on if they show a frequency and continuity, and are pursued in a manner similar to comparable commercial activities of nonexempt organizations." The same goes for bookstores opened during worship services, or the sales of other goods. A thrift store, in which all of the good and products are donated, will be exempt if volunteers perform a substantial amount of the work.
3. The activity is not substantially related to exempt purposes of the church: This one may be the more difficult out of the three, but in essence the activity that generates income itself must be an activity that is in furtherance of the church's purposes as detailed in its articles of incorporation and 501(c)(3) application. For example, if a church sells tacos twice a week, that is unrelated because tacos are not in any way related to the church. On the other hand, if a church has a private tutoring program that they run three times a week, for which they charge tuition, but the program is within a Christian context that also teaches prayer and Scripture, though it is a profit making activity, it is exempt, because it is substantially related to the church's purposes.
Making too much money from unrelated activities
There is one more thing to ponder when the IRS considers your unrelated business income; it weighs it against your church's exempt activities. When a church makes a substantial amount of unrelated business income, it can trigger the IRS to revoke its tax exempt church status and classify it as a for profit business. The best answer to this potential problem is for the church to run these activites through the for profit arm we mentioned earlier instead of the church.
Sales tax
The laws of many states require churches to collect sales taxes when they do fundraisers. For example, if a church in Kansas conducts a regular fundraiser selling baked goods, it must collect and remit sales taxes to the state. A total of 28 states allow a limited number of fundraising events each year. Once a church surpasses a certain number of events, it will have to start collecting sales taxes. Most churches in America do fundraisers and never consider the sales tax.
Dreams that are born in God's heart
I believe that you often dream about the things God is going to do through your ministry. I encourage you to call our team at 770-638-3444 so we can help your dreams become reality.