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Taxation |
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The material in this Taxation chapter
deals with various federal taxation issues, such as these:
- 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
Some state-related tax issues are also discussed.
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. |
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State-Related
Tax Issues |
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Sales
and Use Taxes |
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A sales tax generally refers to
taxes imposed by a state on the intrastate retail sale of tangible
personal property. A use tax is imposed upon the use, storage
or other consumption — but not the sale — of tangible
personable property either purchased or acquired outside the taxing
state. The sales and use tax is imposed at two levels. The first
is that of a buyer. The second is that of a seller. The actual
burden of paying a sales tax falls upon the buyer. It is, however,
the seller that must actually collect the tax and pay the tax
to the state. In numerous states there is an exemption for
religious organizations for the purchase and sale of goods. Hammar's
Tax Guide contains state sales tax exemption information
in the form of a state-by-state chart located at the end of Chapter
12, "Taxation of Churches." Generally, where an exemption is available,
the church must apply to the state and secure a tax exempt certificate.
We advise churches and middle governing bodies to do this to save
money on purchases. Some presbyteries may have secured presbytery-wide
tax exempt certificates that cover all of the churches in that
presbytery. Check with your presbytery. Finally, local legal counsel
should be obtained to evaluate a particular activity of an entity
and its relationship to the exemptions available in that state. |
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Property
Taxes and Related Matters |
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The real property owned by a local
church is generally exempt from property taxes only to the extent
that such property is used exclusively to carry out the purposes
or ministry of the local church. The specific wording of your
state's statutes needs to be carefully reviewed. In the event
any portion of the property is not used exclusively for the purpose
of the ministry of the local church, that portion may not be exempt.
A local church that elects to lease a portion of its property
may find itself in the position of having only a portion of its
property exempt because it leases the other portion of its property
to a nonchurch organization. Churches should check local laws
before entering into such leases.
Generally, all states provide a tax exemption to buildings
that are used as places of religious worship. However, the state
laws concerning other church-owned property vary. The following
are categories of church-owned properties that have been subject
to property taxes in various jurisdictions: surrounding grounds
of a place of worship, rental property owned by a religious
organization, property under construction, manses,, church-owned
vacant land, church-owned campgrounds, retirement homes, and
property being used for religious publishing. Some states will
provide exemptions for such properties; other states will deny
exemptions. This is why it is very important to check the law
in your particular state and consult with your local attorney.
Do not risk running afoul of these laws and losing all or part
of your property exemption. Hammar's Tax Guide, at
the end of Chapter 12, "Taxation of Churches," has a state-by-state
chart property tax exemptions for all fifty states. |
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Challenges to Church Property Tax Exemptions |
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In recent years, the taxation of
real property owned by local churches has become an extremely
sensitive area in the overall church and state relationship. The
ever-increasing cost of government services has focused the attention
of local taxing authorities on properties held by religious organizations
and other nonprofits. While church property tax exemptions previously
were nearly automatic, these exemptions are now coming under close
scrutiny by state legislatures, local taxing authorities, and
tax assessors. The following are examples of recent challenges
to property tax exemptions in various states:
- Appeal of Mount Shepherd Presbyterian Church (U.S.A.)
Camp, 462 S.E. 2d 229 (NC 1995); Presbyterian Church camp
found exempt.
- Nebraska Annual Conference v. Scotts Bluff County Board,
499 N.W. 2d 543 (NE 1993); district superintendent parsonage
found exempt.
- In 1996, Colorado voters were asked to repeal the property
tax exemptions on land and buildings owned by churches and
most charities. After a concerted effort by churches and other
nonprofits, the amendment did not pass.
- In 1995, the City of Philadelphia issued a "payments in
lieu of taxes policy." The policy "is asking all nonprofits
to voluntarily contribute payments in lieu of taxes equal
to 40 percent of what they would have to pay in property taxes
were they to lose the privilege of their tax exempt status."
The fee was reduced if any of the qualifying organizations
entered into an agreement by a given date (reduced to 33 percent).
The application of the "payments in lieu of taxes policy"
did not include "any nonprofit institution that is a purely
public charity as defined by the Pennsylvania Constitution
and relevant case law."
- In 1996, a resident taxpayer in Kimball County, Nebraska,
asked the Nebraska Tax Equalization and Review Commission
to review the tax exemptions granted to parsonages owned by
churches. The matter was appealed by several religious denominations
and was dismissed in favor of the churches.
- In Maine, a campground owned by a religious organization
was requested to pay property taxes on its property because
most of its clients were not state residents. The case went
to the U.S. Supreme Court in October of 1996 and it was determined
that such a practice was unconstitutional because it violated
the Constitution's commerce clause. Camps Newfound/Owatonna,
Inc. v. Town of Harrison, Maine, et. al, 520 U.S. 564.
- Palm Beach Community Church v. Nikolitis, 835 So.
2d 1274 (FL. App. 2002); vacant land acquired by a church
for a future sanctuary was not exempt.
Tax challenges such as these can take away a very important
benefit to churches and other charities. If your church or
governing body encounters such a challenge, call Staff Attorney
April Davenport at (888) 728-7228 x5350 for advice and assistance.
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Taxes
vs. Assessments |
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A distinction should be drawn between
taxes and assessments. Taxes are imposed on the inhabitants of
the taxing area to finance government purposes without reference
to particular benefits to particular owners of properties. On
the other hand, assessments are levied for improvements that are
especially beneficial to certain individual owners of property.
For example, assessments may be levied for streetlights or sidewalk
repairs. Assessment levies are assigned to property owners proportionally
based on the benefit accrued by each property. Real estate taxes
are levied on the basis of a certain valuation of real property
by an assessor or her or his agent. In most jurisdictions,
local churches are liable for the payment of special assessments
but not required to pay real estate taxes.
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Local
Taxing Requirements |
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In most localities, the administration
of the property tax system is handled by an administrative body
operating in response to legislative formulas for the setting
of tax rates. Tax legislation provides procedures to appeal the
tax or assessment amount and to apply for outright exemption from
the tax or assessment. The local church board of trustees should
become familiar with the property tax statutes, administrative
rulings of the tax authorities, and the procedures to be followed
to appeal local tax assessments. Local church trustees also should
analyze the uses of the church's property for the tax status of
the local church property. Local counsel should be obtained to
render advice and to file the necessary actions for local taxes
and assessments.
Local churches should be especially diligent about making
the periodic filings with the property tax authority in order
to remain tax-exempt. Failure to return forms requesting verification
of property use and location can lead to loss of tax-exempt
status with the only recourse then being to reestablish that
status. Churches should avoid the tedious and difficult
task of establishing the exempt status anew by responding promptly
to correspondence from their local tax authority (usually the
tax assessor or the county tax board). Know the requirements
for maintaining the church's property tax exemption and be aware
there often are short deadlines for such responses. |
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Tax Resources |
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IRS phone number for forms and
Ppublications: (800) 829-3676
IRS Forms
and Publications Web site
Church and Clergy Tax Guide by Richard R. Hammar. A
new edition is published each year. To order, call Christian
Ministry Resources at (800) 222-1840 or visit the "Bookstore"
at ChurchLawToday.com.
ValueOptions: (800) 455-5129. This is a benefit provided through
the Board of Pensions of the Presbyterian Church (U.S.A.) to
active ministers and lay employees of the plan.
Tax Guide for Ministers & Churches by Richard R. Hammar
and distributed by The Board of Pensions of the Presbyterian
Church (U.S.A.) each year. Call (800) 773-7752 for copies.
Federal Reporting Requirements for Churches by Richard
R. Hammar and distributed by The Board of Pensions of the Presbyterian
Church (U.S.A.) each year. Call (800) 773-7752 for copies.
Internal Revenue Service Publication 517, Social
Security and Other Information for Members of the Clergy and
Religious Workers — 
Intermediate
Sanctions issues information
Internal Revenue Service Publication 1828, Tax
Guide for Churches and Religious Organizations: benefits and
responsibilities under the federal tax law — .
This plain-language resource has been referred to several times
in this chapter on taxation. While not a comprehensive overview
of the tax law as it applies to churches and religious organizations,
it is an excellent resource of basic information drafted by
the IRS for churches. It covers topics such as tax-exempt status,
inurement and private benefit, political activity and lobbying,
unrelated business taxable income, employment taxes, compensation
of ministers, employee business expenses, record keeping and
filing requirements, charitable contribution substantiation,
and audit rules. The IRS considers this publication a "living
document" and will revise it to take into account future developments
and feedback.
The Pew Forum article
Politics and the Pulpit 2004
The Internal Revenue Service's letter, "
IRS Issues Letter on Exempt Organizations," dated June 10,
2004, to the national political parties concerning the prohibition
on political activity for 501 (c)(3) organizations
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 — Files marked
with this icon can be downloaded in printable Adobe Acrobat
format. This file requires the free Acrobat Reader. For best
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