"Show me a denarius. Whose portrait and inscription are on it?" "Caesar's," they replied. He said to them, "Then give to Caesar what is Caesar's, and to God what is God's." (Luke 20:24-25).
Churches and religious organizations start revenue-generating operations for two reasons. For some, the activity starts as a ministry and is intended to remain that, but the ministry generates some nonvital cash flow. For others, cash flow is critical to the success of the ministry.
The difference between the two types of cash flow is critical to the Internal Revenue Service. The IRS has been paying closer attention to the business operations of tax-exempt organizations to determine whether each activity is an extension of the mission of the organization or a freestanding business with income that should be taxed.
The IRS allows nonrelated business income. But income—as distinct from donations—is taxable if it stems from an activity not "substantially related" to the organization's activities and income. What does that mean? According to IRS regulations, "substantially related" means the trade or business must "contribute importantly to the accomplishment of the exempt purpose of an organization."
The IRS applies three standards when considering whether the activities of tax-exempt organizations are taxable. Income is presumed to be exempt from taxes unless the activity
- Is not substantially related to the organization's exempt purpose or function,