A member of our church owns a cookie business. She would like to bake cookies in our church kitchen for sale to the public because our equipment is much better than what she has been using. Can we allow this as an accommodation to her? Are there legal or other concerns we should consider?
Before agreeing to such an arrangement, church leaders should consider several legal and tax issues, including the following:
- It exposes the church to legal risk in the event that tainted cookies cause death or injury to people who consume them. The church may be liable in such a case based on agency principles as well as other grounds.
- It likely would subject the church to complex and extensive public health regulations under state and local laws.
- It may expose the church to the unrelated business income tax if it receives rental income as a result of the arrangement. This would require the church to file annual unrelated business income tax returns (Form 990-T) with the IRS and pay a tax on net earnings. Some exceptions may apply.
- It may jeopardize the church’s property tax exemption, in whole or in part.
- It may violate local zoning regulations if, for example, the operation of a commercial baking business is not an authorized use in the zoning district in which the church is located.
- It may jeopardize the church’s exemption from federal income taxation since it may violate the requirement in section 501(c)(3) of the tax code that a tax-exempt entity (including a church) be “operated exclusively” for exempt purposes.
- It would establish an undesirable precedent. How will the church respond to the next member who wants to use church property or facilities for a commercial enterprise? If the church denies other requests, it will be perceived as having shown favoritism to one member, which may lead to criticism of the church’s leadership. On the other hand, if it grants similar requests, the church may be overrun with commercial activities. “My house shall be called a house of prayer.” Matthew 21:13.
