Questions on Church Taxation

[placebo]

I'm curious what taxes the church does and does not pay on all levels- federal, state, local, ... . And what types of taxes- income, real estate, sales, ...? I don't know enough about this to even know what questions to ask. Below are some ramblings to get things started.

I remember one time when I was in my early teens (in the late 1960s) my father and I were taking a cab ride in Washington, D.C. The cab driver pointed out a large apartment complex and said that it was owned by the Catholic church and did not pay any taxes. Could that be true?

Another thing I heard one time was that up to 10% of the real estate in a typical U.S. city is exempt from real estate tax due to land owned by government, churches and other tax exempt entities. Has anyone heard anything like that?

Does the tax code treat churches different from non-profits?

Do preachers and other church employees pay the same income and payroll taxes as others?

[Toto]

Churches are exempt from real estate taxes, but I don't think that an apartment building owned by a church as an investment would be exempt unless it had a special exemption as low income housing or housing for church workers.

Churches do have to pay payroll taxes, and the IRS has shut down at least one church for failing to pay payroll taxes.

The major tax benefit that churches get (besides tax free income) is that ministers are allowed to deduct a "housing allowance" from their salaries for tax purposes.

[easychair]

Church buildings with a sanctuary are always tax exempt but property holdings and businesses that are unrelated to a Church's religious mission are subject to property tax as well as state and federal income tax unless they are incorporated as separate nonprofits with a mission that qualifies for exemption. For example, a Church might own a nonprofit nursing home but the nursing home is not directly related to carrying out the exempt mission of a house of worship. It may be considered by the church to have a religious purpose but it is not considered a church in the Internal Revenue Code.

If a church operated a nursing home or a low income apartment building without applying for tax exempt status the income from those businesses would be taxable even though they have a charitable purpose. Also, some businesses, such as a liquor store, could never be determined to have a charitable purpose so if a church owned one exemption would be impossible..

Many states have statutes that exempt certain types of nonprofit organizations (homeless and battered women shelters, for example) from property tax but few states exempt all nonprofits from property taxes.

In most states, Churches and 501 (c) 3 nonprofits are exempt from sales tax on purchases and sales that are directly related to carrying out their exempt mission.

The nonprofit sector is growing faster than the rest of the economy and IRS is concerned about the lack of reporting of unrelated taxable business income by church organizations and nonprofits. Audits are much more common now and the Service is devoting more resources to its office of exempt organizations.

When you see a church or a nonprofit engaged in some sort of trade that is regularly carried on by the private sector questions concerning tax exempt status will come into play. Contact IRS if you feel that a church or a nonprofit is abusing its tax exempt status.

(churches and nonprofits are tax exempt because there is no stock ownership or profit sharing involved. When a church or nonprofit is dissolved all assets after debt payment must go to a government entity or a qualified charity.)

[whichphilosophy]

I'm curious what taxes the church does and does not pay on all levels- federal, state, local, ... . And what types of taxes- income, real estate, sales, ...? I don't know enough about this to even know what questions to ask. Below are some ramblings to get things started.

I remember one time when I was in my early teens (in the late 1960s) my father and I were taking a cab ride in Washington, D.C. The cab driver pointed out a large apartment complex and said that it was owned by the Catholic church and did not pay any taxes. Could that be true?

Another thing I heard one time was that up to 10% of the real estate in a typical U.S. city is exempt from real estate tax due to land owned by government, churches and other tax exempt entities. Has anyone heard anything like that?

Does the tax code treat churches different from non-profits?

Do preachers and other church employees pay the same income and payroll taxes as others?

I've forgotten the exact Biblical wording, but If asked should Churches pay tax, could they reply by saying pay unto Caeser what is his and unto God what is his.

[JerryM]

What I wonder about are the enormous televangelical organizations, like Pat Robertson's. They rake in millions of dollars annually, and own land and buildings that any Fortune 500 company would envy. Are these tax exempt also?

[easychair]

What I wonder about are the enormous televangelical organizations, like Pat Robertson's. They rake in millions of dollars annually, and own land and buildings that any Fortune 500 company would envy. Are these tax exempt also?

Good question. Robertson may have incorporated the 700 Club and CBN as a nonprofit corporation (like PBS) dedicated to religious programming. If that is the case, he would be able to take a fairly substantial, but not excessive, salary but he could not take a share of the net profits of the organization. There could be no stock ownership in the corporation and Robertson would have to answer to a nonprofit board of directors.

Churches and nonprofits can own tax paying businesses that have nothing to do with their charitable or public purpose missions. If a nonprofit owns an unrelated business for the purpose of generating income for its tax exempt mission it must file a 990-T form with IRS every year and pay tax on the income. However, many nonprofits try to hide unrelated (taxable) business income by reporting it as program service revenue on their 990s (federal returns). This is a serious offense.

It is important to determine if a nonprofit's activities are directly related to its specific charitable mission which it must describe in detail on its application for tax exempt status. For example, if a nonprofit obtains exemption to be a soup kitchen it cannot open a tax exempt used clothing store, even though that would probably qualify as an exempt activity, unless it files for exemption on the new mission of selling used clothing.

(In my previous post I mistakenly indicated that churches are exempt for the same reasons nonprofits are. The taxation of churches would violate the free exercise clause.)

[travc]

Not adding any really useful info, but just a heads up. Some churches, especially the Catholic Church, have large land holdings. Some of those holdings are indeed in the form of low income housing and other socially conscious not-for-profit (and some for-profit I think) buisnesses/institutions.

This is mostly a good thing IMO, and has a deep history. At least some of the justification of their tax status is predicated on the socially conscious role they play. Interestingly, you or I could develop various tax exempt secular projects that would be tax exepmt because of the rules put in place (and fought for) by Churches for some of their projects. Giving credit to religious institutions when it is due (and there are a lot of credit they deserve) is more than just good form.

[easychair]

I agree that church charities deserve recognition but many are hard to distinguish from for profit corporations.

Catholic and other church affiliated hospitals claim to be purely charitable but most of their "uncompensated care" is bad debt and the difference in reimbursement between private insurance and Medicare and Medicaid billing. Relatively little of their charity care comes from their supporting foundations.

Many of the large religiously affiliated health care groups own businesses (pharmacies, optical shops, medical supply companies, fitness centers, etc.) that get tax advantages that private, for profit, businesses don't get. This has created considerable tension between private business and the nonprofit sector and legislative reform has been proposed.

As I said, there is no stock ownership or profit sharing in nonprofit organizations but that alone is not enough to preserve tax exempt status. For example, IRS is taking a much closer look at how much actual charity care nonprofit hospitals and clinics deliver. They do not recognize bad debt and inadequate insurance reimbursement as charity care.

The Service is also focusing this year on the use of 501 (c) 3 hospital revenue bond proceeds and excess benefits for health care industry executives. Audits will be more frequent from now on.