The Furor of U.B.I.T.
The average Church in the United States struggles to meet budget from month to month. This has become even more evident as only a mere 11% of Christians truly tithe in America. Churches often use old proven methods or scramble for new ideas that can bring extra cash into the coffers.
Regardless of the terms used to describe these events, the bottom line is they are fundraisers. Some Churches resort to dinners, some to selling portraits and Church Directories, and some even use the raffle. Many Church won’t refer to it as a raffle because they teach that gambling is a sin, so those Churches calling it a “drawing” for a prize.
Some Churches retool the term of “fundraiser” to make it seem more spiritual. For instance, I am aware of many Churches that do not sell Chicken Dinners, but they do have congregational luncheons or dinners and then tell everyone to make a donation. Regardless of the semantics, it is a fund raiser because tangible goods were received for any donation that was made – whether it was a meal, or the prize from the drawing.
Several Churches have borrowed unwanted trouble simply because of the avenue used to funnel funds into the Church. One case in point is that of raffle/drawing. Other than Native-American owned Casinos, I only know of two states that legally allow gambling – Nevada and New Jersey. Therefore, that “raffle/drawing” is a form of gambling and is probably outlawed in your state. This basically means that all it would take is for one disgruntled person, to report the Church activity to a District Attorney/Solicitor and the Pastor and Church Leaders could be facing huge fines and possible prison terms.
Those reading this have probably identified their Church in the scenario.
The furor of all of this is the mistaken notion that funds raised via these “non-profit” fundraisers are donations that are tax-deductible, tax-exempt contributions. Nothing could be further from the truth. Churches usually obtain their funds through four methods:
- Donations
This one is easy. People donate money freely to the Church, expecting nothing in return. This is tax-deductible if you have a Letter of Determination from the IRS. If you have no Letter of Determination, please understand that any money donated is strictly up to the mercy of any IRS auditor as to whether or not it will be deemed tax-deductible.
The donor has no control over how the donation is used.
- Income from goods/services
This includes the selling of CD’s and DVD’s of the services, book store sales, or potluck dinners (including those where “donations” are accepted for the meal).
- Gaming
This area includes money derived from bingo night at the Church, raffles/drawings, rummage sales, etc.
- Fundraising
This would consist of income from potluck dinners, doughnut sales; carwashes, or any number of other goods or services offered by the church
Income derived from items two – four, are not tax-deductible and providing giving receipts for tax credit can result in heavy penalties for the Church, Pastor, and Church Leaders.
What Classifies the Income as Tax-Deductible?
To be tax-deductible the gift must fit into one of four categories. Those categories are considered as normal Church income and are:
- Tithes
- Offerings
- Mission Fund
- Building Fund
Income derived from any other source is not tax-deductible for the individual and may be subject to Income Tax to be paid by the Church. The income must also come with “No Strings Attached.”
Unrelated Business Income is covered by Sections 511 and 512 of the Internal Revenue Code. These sections basically describe Unrelated Business Income to be any income a Church receives that is not directly related to its exempt purpose.
There are currently 133 items that are considered as Unrelated Business Income and are subject to tax once it meets a certain threshold.
Be Careful
Many Churches will not be able to function without some fundraisers throughout the year. However, please take into consideration any and all consequences of the fundraising activity. What good is the fundraiser if it costs you more than you will gain.
This is where Chitwood and Chitwood, the Number One Church and Clergy Tax Professionals in the world, can help. Our 77 years of experience has allowed us to help more Churches successfully navigate through challenges such as this than any other organization in America.
For further information contact Dr. Shaw at drshaw@cmtc.org or call 800-854-5891 to order The Furor of U.B.I.T. cd package.
It would behoove every Pastor, Church Leader and Treasurer to attend the nearest Church Management Tax Conference. Go to www.cmtc.org or call 800-344-0076 to register for the next available conference. DO NOT DELAY! Every moment wasted could be moments your church is in trouble with the IRS. GET COMPLIANT TODAY!
