Can Renting to a For-Profit Hurt Your Church’s Status?

Here are six things to consider before renting out your church facilities.

Here are six factors your church should assess before you say yes to a for-profit business renting your church’s facility.

1. Property Taxes

This is probably the most common reason why a church would want to be hesitant at the thought of renting to a for-profit business. Many states allow churches to obtain property tax exemption. A church facility carries a very high appraisal value, which means they also would have to deal with a high annual cost of having to pay property tax if it were not for property tax exemption.

By renting a portion of your church’s facilities to a for-profit organization, you could put your church property tax in jeopardy, much like the First Presbyterian Church of Miami experienced not too long ago. Click here to read more about that event.

2. Sales Tax

Many states have regulations that require your church to collect sales tax on a lease or rental agreement. The best way to find out about your state’s requirements is to contact your state’s department of revenue and ask one of their representatives if sales tax is required to be collected.

Part of the consideration here should also include an examination of whether the church is receiving unrelated business income. Though, in some cases, a church may not be required to pay sales tax on the rental income of their real property, they may be required to pay income tax on the rental of any personal property.

There is a difference between the two. Real property has to do with anything that is considered the building or a part of the building, like kitchen cabinets, sanctuary chairs, or pews. The personal property of the church is considered as items like a mobile sound system, chairs, tables, or any type of mobile equipment. The rental of these items could result in unrelated business income tax. Which, if a church is acquiring unrelated business income of more than $1,000 per year, then the church would need to report the total income on a Form 990-T to the IRS.

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3. Private Inurement

If the group or individuals looking to rent the building is someone whom the IRS would describe as a disqualified person, then the church could end up facing an excise tax of up to 225 percent of the value of the benefit.

A disqualified person is defined on the IRS website as “any person who was in a position to exercise substantial influence over the affairs of the applicable tax-exempt organization. Family members of the disqualified person and entities controlled by the disqualified person are also disqualified persons.”

Therefore, a disqualified person could be anyone on the board of directors (of the church or ministry) or anyone related to them. It could also be someone with an invested interest in the organization who is looking to rent the facility. This can be an area of concern.

4. Fair Market Value

If the church is going to rent or lease its facility to an organization, it should be done at a rate that would be considered fair market value. By doing this, the church puts itself in a position where it is not providing private benefit to one individual or organization.

If it is to provide it at less than fair market value, then the church would want to provide the tenant a Form 1099 to show the difference between the required rent and the fair market value.

5. Insurance

If the church has counted all the costs from the previous points and still sees value in renting its facility to an individual or organization, then it should consider how this might affect their current insurance coverage. Even if the church is considering a tenant that is a nonprofit, it would still be wise to assess their activities and functions in conjunction with the insurance coverage that the church holds.

6. Policies

A few years back when I was a senior pastor in a small rural town in Kansas, we were just months away from our new church building’s open house. I was very excited. It had been a long, hard-fought 18 months to turn what was once a wheat field into what is now a 10,000-square-foot church.

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I remember sitting at my desk staring at my computer screen realizing that we needed to write some sort of policies—specifically policies for church building usage. I knew that a new fancy building would attract people who would want to use it for weddings, birthdays and anniversary parties. All of these are very common to have in a church’s facility.

However, I wanted a document that would help outline expectations and would protect the church from certain liabilities. I clearly recall staring at that blank screen for such a long time … and I never got those policies written. If you have ever found yourself in the same position, I encourage you, do better than me and take the time to develop an event use agreement.

Here are some items that should be included in your agreement.

• The renters are in charge and control of the space they are using.
• No supervision will be provided.
• The church does not warrant or represent that the space is safe or suitable for the event, and the renters are responsible to ensure that all measures necessary be taken to maintain public safety that is consistent with their intended purpose.
• If the renters are going to use your instruments or other appliances, they should be provided on an “as is” basis without any warranties.
• You do not set up or tear down.
• The renters clean after they are done.
• The agreement should contain an indemnification clause. This is a clause that releases your church from liability resulting from the use of the space.

This article first appeared on StartChurch.com. Used by permission.