Creative Income Sources: Don’t Lose Your Tax-Exempt Status

Do’s and Don’ts when fundraising outside the box

A decline in the success of traditional fundraising methods means more ministries are tapping into creative revenue streams. Emerging ideas include leasing property, starting businesses, hosting 5K races, and more.

Ministries moving in to the creative fundraising space should familiarize themselves with the do’s and don’ts of generating income outside of their religious purpose. Knowing the rules will provide financial transparency and keep your tax-exempt status intact.

DO research state regulations. Most states have regulations regarding soliciting and fundraising in the state. Many states require nonprofit organizations to register before they solicit donations from individuals within the state. This issue is especially important for ministries conducting fundraising online. To help, the National Council of Nonprofits has compiled a list of resources on its Charitable Solicitation Registration webpage. 

DON’T ignore potential tax implications. Even though a religious organization is recognized as tax exempt, it still may be liable for tax on creatively earned income. For most tax-exempt organizations, unrelated business income tax (UBIT) is taxable income from a trade or business, regularly carried on, that is not substantially related to the basis of the organization's exemption. The IRS offers help for nonprofits on its Unrelated Business Income Defined webpage. You can read more about how UBIT affects ministries from Brotherhood Mutual.

An exempt organization that has $1,000 or more of gross income from an unrelated business must file Form 990-T. An organization must pay estimated tax if it expects its yearly tax to be $500 or more.

Religious and charitable organizations are typically exempt from paying property taxes, but there are limitations here, too. If ministry-owned property is not used exclusively for exempt purposes, you may lose your property tax exemption. However, most states will consider whether the exemption would be lost for the entire property or just for the portion which is used to earn the unrelated business income. You can discuss this issue with a local tax professional or your county tax assessor’s office. 

DO thoroughly vet professional fundraisers. Even when a ministry pays a professional fundraiser, the ministry must protect itself by taking proper precautions:

1. Ensure the fundraiser is registered in all applicable states.

2. Insist on an independent contractor agreement with the fundraiser. Brotherhood Mutual offers several articles to help guide ministry interactions with independent contractors.

DON’T misuse government grants. Federal and state grants can be a huge asset to ministries, but this funding source may involve restrictions which affect faith-based organizations.

The US Supreme Court has said that faith-based organizations cannot use any part of a direct governmental grant to fund religious worship, instruction, or proselytization. Instead, organizations may use government money only to support the non-religious social services that they provide. Some indirect grants, like child-care certificates or school vouchers, can be used to obtain services from faith-based organizations. Take care to account for use of all government grant money.

Grant-issuing organizations—both private and public—may tie additional restrictions to their offerings, such as requiring the recipient to acknowledge a commitment for whom the grant-funded program will serve. Be sure to read the fine print. Clause commitments related to non-discrimination may not intersect with your ministry’s statements of beliefs. 

For example, the Department of Justice offers federal grant funds that may not be used for inherently religious activities. The funds can only be used to further the objectives established by Congress such as reducing crime and assisting victims of crime.¹ 

DO practice careful accounting. Just like money received by a ministry from tithes, offerings, and any other normal sources, ministries should properly account for money generated from creative income sources. Good accounting practices protect a ministry from any allegations of misuse of funds or other ethical indiscretions.

Ministries should ensure there is complete transparency regarding the following items:

• Amount of money needed to be fundraised/generated

• Sources of income

• Accounting procedures

Establish a method that allows for confidentiality when necessary (e.g., anonymous donors). Supporting documentation is also critical. Ensure that you can substantiate charitable contributions and that your banking and accounting records are reviewed by a third party.

Creative income sources help stretch your tithing dollars farther. Whether you sell honey from hives on your property, lease an unused building, or successfully obtain grants, the revenue you generate impacts your overall mission, outreach activities, and capital projects. Knowing what you can and cannot do with those funds, and how to properly account for them, helps ensure a sustainable ministry.  

The following articles can help you learn more:

Financial Safeguard Resources

• Protect Your Finances with Internal Cash Controls

• Watch for Financial Irregularities

• Protect Ministry Finances from Embezzlement

• The Big Book of Checklists: Legal and Finance

Government Resources

• Publication 598, Tax on Unrelated Business Income of Exempt Organizations

• UBIT Exceptions and Exclusions

• UBIT Online Course 

• UBIT tax returns

1 “Faith-based and Community Initiatives, Frequently Asked Questions.” United States Department of Justice Archive, https://www.justice.gov/archive/fbci/faq.html. Accessed 7 January 2020.