Q: A member of our church owns a cookie business and wants to use the church’s commercial-grade kitchen to bake cookies for public sale. Can we allow this as an accommodation to her? Are there legal or other concerns we should consider?
While this might seem like a generous accommodation, allowing running a business in a church raises several legal, tax, and operational concerns. Before proceeding, church leaders should carefully evaluate these potential issues.
Legal and Liability Risks
Allowing a business to operate on church property exposes the church to liability risks. For example, if someone becomes ill after consuming the cookies, the church could face legal claims based on agency principles or other legal grounds. Even with a well-drafted agreement, these risks may not be fully mitigated.
Public Health Regulations
By permitting the use of church facilities for commercial food preparation, the church may become subject to stringent state and local health regulations. These include inspections, certifications, and adherence to commercial food safety standards, which could complicate operations and increase oversight responsibilities.
Unrelated Business Income Tax (UBIT)
If the church receives rental income from this arrangement, it may trigger the IRS’s unrelated business income tax (UBIT) rules. This could necessitate filing an annual Form 990-T and paying taxes on any net income. However, some exceptions might apply, such as if the use of facilities is primarily conducted by volunteers or for activities substantially related to the church’s mission. Learn more about UBIT at the IRS UBIT guidance page.
Property Tax Exemption Concerns
Allowing a commercial enterprise to operate on church property could jeopardize the church’s property tax exemption. In some states, using church property for non-exempt purposes may result in partial or full loss of the exemption.
Zoning Regulations
Local zoning laws may prohibit running a business in a church. For instance, a commercial baking operation might not be an authorized use within the zoning district where the church is located. Violating zoning regulations could lead to fines or legal disputes.
Compliance with IRS Section 501(c)(3)
The church’s tax-exempt status under Section 501(c)(3) requires that it operate exclusively for exempt purposes. Allowing a commercial business to operate within the church could be viewed as inconsistent with this requirement, potentially risking the church’s federal income tax exemption.
Establishing a Precedent
Granting permission to one member could set a precedent, leading to similar requests. Denying future requests may create perceptions of favoritism, while approving them could result in an influx of commercial activities, detracting from the church’s primary mission. As Matthew 21:13 reminds us, “My house shall be called a house of prayer.”
Steps for Churches to Consider
If your church is considering allowing a business to operate on its property, here are some critical steps to take:
- Consult Legal Counsel: Seek guidance to understand the legal implications and draft agreements that protect the church from liability.
- Review Local Regulations: Ensure compliance with zoning laws, health regulations, and other local requirements.
- Assess Tax Implications: Work with a tax professional to evaluate potential UBIT liabilities and maintain compliance with tax-exempt status requirements.
- Establish Clear Policies: Develop a policy governing the use of church facilities to ensure consistent decision-making and avoid favoritism.
FAQs: Running a Business in a Church
1. Can a church allow a business to operate on its property?
Yes, but doing so may create legal, tax, and operational risks. Churches should evaluate liability, zoning, and IRS requirements before proceeding.
2. Does rental income from a business on church property trigger UBIT?
Rental income may be subject to unrelated business income tax (UBIT), especially if the activity is not substantially related to the church’s mission.
3. Could a business on church property impact property tax exemptions?
Yes, using church property for non-exempt purposes could jeopardize its property tax exemption in some states.
4. How can a church avoid risks when accommodating businesses?
Churches should consult legal and tax professionals, comply with zoning laws, and establish clear policies for facility use.
Allowing running a business in a church requires careful consideration of legal, tax, and operational risks. By taking proactive steps and seeking professional guidance, churches can make informed decisions that protect their mission and resources.
