• Federal Taxation of Ministers (income and self-employment, i.e., Social Security)
• Group Federal 501(c)(3) Tax Exemption
• Unrelated Business Taxable Income
• Substantiating and Reporting Charitable Contributions

Throughout this chapter and the entire Legal Manual generally, you will see references to Richard Hammar's Church & Clergy Tax Guide (Hammar's Tax Guide. This is a useful resource we highly recommend. It is written for nonlawyers and lawyers alike. It is updated each year to include the latest changes in the federal law. If you want more detailed information regarding the subjects discussed in this section, we advise you to consult Hammar's Tax Guide. In addition, you may wish to share it with your attorney, accountant, or tax provider. For copies call (800)222-1840 or visit the "Bookstore" at ChurchLawToday.com. Copies are $17.95 each.

• Federal Taxation of Ministers
• Self-Employment Tax
• Federal Income Tax
• Status of Ministers (Employee versus Independent Contractor)
• Housing or Manse Allowance
• The Presbyterian Church ( U.S.A.) Group Federal 501(c)(3) Tax Exemption
• Intermediate Sanctions
  • Intermediate Sanctions Summary
• Disclosure Regulations
• Sample Section 6104(d) Disclosure Statement
• Restrictions on Political Activity and Lobbying
• Unrelated Business Income Tax
• Excise Taxes
• Substantiating and Reporting Charitable Contributions
• Substantiation
• Quid Pro Quo Rules
• State Related Tax Issues
• Sales and Use Taxes
• Property Taxes and Related Matters
• Challenges to Church Property Tax Exemptions
• Taxes vs. Assessments
• Local Taxing Requirements
• Tax Resources
• Sample Manse Allowance Forms
• Housing Allowance Notification by Church to Minister —
• Housing Allowance Insert for Minutes of Meeting —
• Polity Note #24: Tax Status for Commissioned Lay Pastors
• Polity Note #69: Minister Employer
• Private Letter Ruling Regarding Methodist Deacons

1. The activity must be a trade or business.
2. It must be carried on regularly.
3. It must not be substantially related to the church's exempt purposes.

These three conditions must be met in order to find a church's income is subject to the unrelated business income tax. If one of these conditions is not present, the tax is not due.

Even where all three of the above conditions are met, there are still circumstances in which the tax may not be imposed:

(a) substantially all of the work in operating the trade or business is performed by volunteers; (b) the activity is conducted by the organization primarily for the convenience of its members; or (c) the trade or business involves the selling of merchandise substantially all of which was donated. If any of these exceptions apply, the income from the activity is not treated as unrelated trade or business income. Further, in general, rents, royalties, capital gains, dividends and interest are not subject to the unrelated business income tax unless financed with borrowed money. (IRS Publication 1828, Tax Guide for Churches and Reigious Organizations).

Internal Revenue Service Publication 1828, Tax Guide for Churches and Reigious Organizations — , has a more complete explanation of UBIT. Also, see Hammar's Tax Guide for further explanation and examples. Another very good UBIT review is found at 39 Cath. Law 7. This is a law review titled The Catholic Lawyer, and the article is titled "Show Me the Money: Legal and Prudential Considerations for Religious Organizations Participating in Fund Raising Ventures." This article cannot currently be found on the Internet. However, you may use the cite provided above to find the article at a law school library or by using a fee-based computerized legal research system such as Westlaw or Lexis.

1. The name of the donor.
2. A listing including each individual contribution of $250 or more (churches are not required to aggregate smaller contributions that add up to $250 or more in order to trigger these requirements).
3. A statement that no goods or services were provided to the donor in exchange for the contribution. We suggest all church statements reflecting money contributions, such as quarterly giving reports, state the following:

Pursuant to Internal Revenue Code requirements for substantiation of charitable contributions, ______ Presbyterian Church provided no goods or services in return for these contributions. (You may wish to add "except intangible religious benefits".)

4. A description (but not the value) of noncash property (if any) contributed.
5. The name of the church.
6. The date of the contribution.

The written acknowledgment must be in the donor's hands prior to the date on which the donors tax return is filed, or prior to the due date for filing, whichever is earlier.

For the typical Sunday morning contribution of cash or check of less than $250, there are no reporting changes or substantiation changes for the taxpayer. The canceled check or receipt from the donee church showing the church name and the amount and dates of the contribution are still sufficient for this type of contribution.

Here are two typical examples:

• Mrs. Jones contributes $100 a week in an envelope in the Sunday morning collection plate; the church is not required to give her a written receipt.
• Mrs. Smith contributes one check each month of $400, which she puts in an envelope on one Sunday morning each month; the church is required to give her a written receipt.

Some individuals who serve as volunteers, committee members, and directors of church organizations may incur out-of-pocket expenditures in those activities that may qualify for charitable deductions if all substantiation acknowledgment requirements are met. Volunteers travel to do a work project bringing their own supplies. Their travel and other actual expenses may qualify for a charitable deduction contribution. The IRS has indicated that the volunteer may satisfy the substantiation requirement if: (1) adequate records of expenditures are kept; (2) the church organization furnishes a written acknowledgment that services were performed that required the expense (i.e., travel away from home); and (3) the acknowledgment states no goods or services were provided to the volunteer or provides a good faith estimate of the value of such services.

In accordance with Internal Revenue Code requirements, we are required to inform you that the amount of your contributions that is tax-deductible is limited to the amount of the contribution you made less the value of any goods or services we provided in return. The law requires us to furnish you this statement and a good faith estimate of the value of goods and services provided to you in connection with this gift. The value of the goods or services provided to you is $ _____.

The only exceptions are where the goods are token gift items (such as pens, pencils, and so on) bearing the church name and having a cost of $8.00 or less, or where the value of the goods or services is less than the lesser of $80 or 2 percent of the amount of the contribution (these dollar amounts apply to 2003 and may be adjusted in future years).

Some examples illustrate the requirements: At a church fund-raising sale a person buys a chair for $300 which has a value of $40. This must be reported because it is not a token gift bearing the church name and the value is more that $6 (2 percent of the $300 contribution). If a person buys a book for $120, which has a value of $2, the church has no reporting requirement because the $2 value of the book is less than 2 percent of the $120 paid for it.

If the contribution is less than $75, the donor may only deduct the amount of the donation less the value of the item received, but the church does not have a reporting requirement.

See Hammar's Tax Guide for a more detailed explanation of the rules for substantiating and reporting charitable contributions.