What are religious organization ancillary activities?
Activities undertaken by a church or a religious organization that are in addition to or outside the traditional activities of a church or religious organization.
Are there different types of religious organization ancillary activities?
Yes, there are four different types of ancillary activities.
1) Primary Purpose Activities
– Outgrowth of church activity:
- School (religious training)
- Service activities (mission work, youth ministry, Meals on Wheels program, etc.)
– Does not necessarily give rise to needing other entity
2) Complimentary Activities
– Adds value for to the membership:
- Allows the church or religious organization to deepen its relationship with its parishioners or otherwise meet the demands of its membership
- Creates a “stickiness between the church and its parishioners
- Enhances religious services
– Classic examples include:
- School (K-12 with religious overlay, for children of members)
- Hospital (serving the poor)
- Church Camp
- Pre-K Childcare
– Modern examples include:
- Online educational service to assist with homeschooling
- Senior Housing Development (open to all)
- Musical Group that tours and records music
- Art Gallery
- Coffee Shop
- Corporate Retreat Center
– Activities that grow out of the community of the parish and start at the “church”
– Example: “Institute of Agriculture,” group of parishioner with an interest in sustainable agriculture teamed with UofM to form at joint venture with a country in Africa
4) Revenue Generation
– Using the assets of the church to generate revenue – capacity
– May only be “thematically” related to the church and its activities
- Publishing Operations
- Amusement Parks
- Renting out unused school buildings
- Parking lot
- Workout facility
- Transportation Services
- Event Facilities
What are the legal implications of religious organization ancillary activities?
Improperly structuring the legal, tax and governance structures of these ancillary activities can have adverse legal and tax consequences, including:
– Ancillary activities could give rise to liabilities that would erode church assets
– Develop a classic parent/subsidiary relationship between the religious organization and ancillary activity to make sure the “risks” are partitioned off
– May need to shield the church assets from financial risk associated with church (for example turn the building into a historic site)
– The IRS may audit a church if it reasonably believes that the organization may be carrying on an unrelated trade or business (Unrelated Business Income Tax/UBIT)
IRC Section 512 provides that a tax-exempt organization’s revenue generating activities will be subject to UBIT if:
–The income is derived from a trade or business.
- Trade or business generally includes any activity carried on for the production of income from the sale of goods or performance of services.
–The trade or business is “regularly carried on” by the organization.
- A business activity will be considered “regularly carried on” if it is frequent and continuous, and the manner in which the business is pursued is generally similar to comparable commercial activities of nonexempt organizations.
–The business activity is not considered “substantially related” to the organization’s exempt purpose.
- A business activity will be considered substantially related if it contributes importantly to an organization’s exempt function.
So how should a religious organization treat s ancillary activities?
First, the organization should ask itself the following questions:
- Why does the church want to own, operate or undertake the activity?
- How does the church plan to fund these activities?
- How does this activity fit into the church’s primary purpose (of being a church)?
- Who is going to operate and control this activity?
- Does or can undertaking this activity in anyway implicate or impact the church’s tax-exempt status as a church?
Depending on the answers, the religious organization should consider the following options:
– Operates under the Church as an activity of the church
– Unincorporated association
– Separate entity options
- Nonprofit Limited Liability Company (322B soon to be 322C)
- Nonprofit corporation 317A
- For profit corporation 302A
- Limited Liability Company
– Taxation Options
- Separate tax-exempt organization (that files a 990)- stands alone completely or supporting organization (type I, II or III)
–Wholly-owned LLC disregarded for tax-purposes
–Investment in a for-profit operation