Unrelated Business Income

Question: What is unrelated business income (UBI) and when is reporting unrelated business income required?

Answer:  Unrelated Business Income (UBI) for most organizations is income produced by activity (and subject to unrelated business income tax) that meets all three requirements:

1. It is a trade or business.
2. It is regularly carried on.
3. It is not substantially related to furthering the exempt purpose of the organization.

When UBI exceeds $1,000 in a calendar year, then a reporting requirement is triggered.

Church Operating Another Business

Question:
How can we as a church start a business that could (1) put congregants to work and (2) create another funding stream to the church?

Answer:
That is a noble and creative idea but it is really outside the purposes of a church’s charter (to propagate the Gospel.) It would also be operating beyond the church’s 501(c)3 charitable designation and not-for-profit status.

Whoever, prayed and heard God’s direction on starting a business would really be the person or group to start their own business. It should be completely separate from the church.

Will operating a daycare create problems for my 501(c)3 status?

Question:
My church is working to have a daycare operating on premises this fall. The daycare will be for-profit. I understand from other churches that they operate daycares under the umbrella of their IRS not-for-profit status. How can I operate our daycare under our not-for-profit status?

Answer:
I will assume that the daycare is church owned. Essentially you do not have to do anything from an IRS perspective. You will not violate your 501(c)3 status. Daycares have long been designated as a ministry of the church. They religiously educate the little ones and assist the families by providing safe care.

Typically the daycare may operate with a positive cash flow but it will not typically be profitable. After paying for salaries, equipment & supplies there may still be a positive cash flow. However, a church would not typically pay itself for mortgage/rent, insurance, utilities, common area maintenance (CAM), etc. If they did they would quickly eat up the remaining positive cash flow and find it at a break-even or loss. Our church has a 170 student preschool & elementary. We operate on a slightly positive cash flow basis, however, we would show a loss if I allocated costs to them for facilities and overhead.

In our denomination, we need to have denominational approval. There are special applications, as well as, annual requirements & reports that must be filed with them. You will also want to fully understand your state & local daycare laws. They will be the ones who present you with the flaming hoops to jump through. According to NC state law if I operate our preschool for no more than 4 hours per day, I do not have to comply with the most stringent state daycare requirements. Do you research.