1. Religious Organization Tax Issues Chapter 7 pp. 271-304
2019 National Income
Tax Workbook™

2. Summary Entity Tax-Exempt Status Entity Taxation and UBTIpp
Entity Tax-Exempt Status
Entity Taxation and UBTI
Taxation of Service Providers
Church Audits

3. Tax-Exempt Status pp
501(c)(3) organized and operated for exempt purposes
Entity type – corp., association, or trust. Some LLCs and partnerships

4. Organizational Test p. 273
Articles – organized exclusively for exempt purposes
No more than insubstantial lobbying
No political campaigning
Distribution clause

5. Ex p. 273
Formed exclusively for religious and charitable purposes w/in meaning of 501(c)(3)
Meets the organizational test

6. Examples p. 274
7.2 - Also authorized to engage in manufacturing and operate a social club - FAILS
7.3 – Best interests, common welfare, and well being - FAILS

7. Legislative/Political Activities p. 274
Can’t authorize:
More than insubstantial activities influencing legislation
Participation in political campaign
Action organization (discussed later)

8. Distribution on Dissolution p. 274
On dissolution assets must be distributed for exempt purpose
Figure 7.1 (p. 275) sample dissolution clause

9. Operational Test p. 275
Operates exclusively for exempt purposes
No private inurement (earnings benefit insiders)
No private benefit (anyone)

10. Ex. 7.4 p. 275
ABC church is Levi, his wife, and kids Uses church $ for food, clothing, living expenses Private inurement

11. If more than insubstantial, fails the organizational test
Action Organization p. 275
Contacts or urges to contact legislative body
Advocates for/against legislation
Add’l criteria p. 276
If more than insubstantial, fails the organizational test

12. Application for Exemption pp. 276-277
Churches automatic
Others 1023 or 1023-EZ
Group exemption if
Affiliated
Subject to supervision or control
Exempt under same subsection

13. Entity Taxation – UBTI p. 278
Trade or business
Regularly conducted
Not related to performance of exempt purpose or function
Ex. 7.5 food stand 2 weeks per year – not regularly conducted

14. Ex. 7.6 p. 279
Religious organization has historic dairy farm for education
Sells milk, cream to make ice cream
Unrelated T or B

15. UBTI - Publishing pp
To disseminate religious views – OK
Publishing unrelated material – UBTI
Look at 14 factors from audit technique guide

16. Not UBTI Examples p. 280
All volunteers
Member convenience
Sale of donated items, low-cost articles

17. Not UBTI p. 280 Ex. 7.9 Synagogue volunteers operate retail store
Ex Monastery has restaurant and laundry for retreat members
Ex Church thrift shop sells donated items

18. Exchange membership lists Qualified sponsorship payment
Not UBTI p. 281
Low cost articles ($11.10)
Bingo
Exchange membership lists
Qualified sponsorship payment
Not advertising
Not contingent on attendance/ratings

19. Not a qualified sponsorship payment if:
Not UBTI, Cont. p. 282
Not a qualified sponsorship payment if:
Made in connection w/qualified trade show or convention (attract new members or promote is OK)
Entitles payer to acknowledgment in a periodical

20. Calculating UBTI pp
Separate for each T or B
Increase by disallowed transportation fringe
Exclude dividends, interest, etc.
Deduct expenses directly connected w/ T or B

21. Exclusions from UBTI p. 283 Dividends Interest Annuities Royalties
Rents
Gains from disposition (except inventory and cut timber)

22. Deductions from UBTI p. 284
Reduce by directly connected deductions
Allocate dual use expenses
NOL deduction – w/ limits
Charitable contribution deduction

23. Include share p/ship income and deductions
UBTI Deductions, Cont. p. 285
$1,000 specific deduction
Include share p/ship income and deductions
Ex Hindu Cultural Society is a partner in partnership that operates factory. Must include share of gross p/ship income (and deductions).

24. Debt-Financed Property pp. 285-288
Include investment income if from debt-financed property
Not if 85% or more substantially related to exempt purpose
Neighborhood land rule – intend to use adjacent property in 10 years

25. UBTI Filing p. 289
Form 990-T
Total gross UBTI $1,000 or more
File by 15th day of 5th month after tax year

26. Excess Benefit Transactions p. 289
25% excise tax when tax exempt org provides economic benefit to disqualified person
10% additional tax on organization mgr. who knowingly participates

27. Taxation of Service Providers p. 290
Minister is any religious leader
Common law employer/employee rules apply
Income tax on all earnings (except housing allowance)
Deduct business expenses

28. Minister Compensation pp. 291-292
No federal tax w/holding if duly ordained and salary for ministerial services
Subject to SE tax but can request exemption

29. Church Employees pp
Church can elect out of employer’s portion of FICA
Employee may apply for exemption from SE tax

30. Amish and Mennonite p. 293
Income tax
Request exemption from SE tax
Only SE income
Only income from another exempt person

31. Housing Exclusion pp
Exclude housing allowance or fair-rental value of parsonage
Still included for SE tax
Officially designate in advance
Have to allocate deductions between taxable and tax-exempt

32. Ex. 7.22 p. 295 Temple pays rabbi 12K/yr housing allowance
He pays $13,200 mortgage, utilities, etc.
Fair rental value (FRV) is 11K
Can exclude 11K (lowest of 1, 2, and 3)

33. Ex p. 295
Church allows reverend to use parsonage
Church pays $7,500 for utilities
Exclusion for utilities limited to actual cost - only 7K

34. Allocating Expenses p. 296
I.R.C. 265 – allocate expenses between taxable/nontaxable income
Excluded $ ÷ total ministry income = %
Business expenses x %

35. Health Insurance Costs p. 296
SE ministers may be able to deduct medical/dental expenses (SE health insurance deduction)

36. Church Audits p. 297
I.R.C governs Figure 7.3 Overview of the audit process

37. Starting a Church Audit p. 297
Reasonable belief
Not exempt
UBTI
Other taxable income
p. 297 reasonable belief sources

38. PN Reasonable Belief p. 298
Repeated (2 or more) failure to respond to IRS is reasonable belief to start an inquiry

39. Notices p. 299
First notice – general explanation, right to conference
Second notice – to examine records

40. Notice Time Limits p. 300
Mail 2nd not less than 15 days after 1st
Wait 15 days after 2nd

41. Audit Next Steps pp
Conference (if requested)
Examine records and activities
Final determination
Notice of deficiency or assessment of underpayment
2-year SOL

42. Assessment and Collection p. 303
Action based on
Revocation of status – 3 years
Qualification for exemption – 3 years
UBTI (6 years)
Other issues – no limitation if no return filed

43. Other Audit Rules pp
Limit on multiple examinations
Remedies for IRS violation of audit rules limited – issue stay until comply

44. QUESTIONS?