Unrelated Business Income (Church)

Even though churches are tax-exempt, they can still owe federal income tax on what's called unrelated business income (UBI). The IRS defines this as income from a trade or business that is (1) regularly carried on and (2) not substantially related to the church's exempt purpose. If your church earns this kind of income, it owes unrelated business income tax (UBIT) and must file Form 990-T.

The key word is "regularly." A church that holds an annual rummage sale or spaghetti dinner fundraiser is generally safe — those are intermittent activities, not a regular business. But if the church operates a bookstore that sells to the general public year-round, or leases part of its building to a commercial tenant on an ongoing basis, that income likely qualifies as UBI.

There are important exceptions. Income from volunteers (where substantially all the work is done by unpaid workers) is excluded. So is income from selling donated merchandise, convenience-related activities for members, and certain rental income from real property (as long as the church isn't providing significant services alongside the rental). Investment income like interest and dividends is also generally excluded. The rules are detailed, and the line between related and unrelated can be blurry — a church-run thrift store staffed by volunteers is fine, but the same store staffed by paid employees might trigger UBIT.

Many churches generate income beyond tithes and offerings — rental income from event space, coffee shop revenue, bookstore sales, daycare programs, or parking lot fees. If this income crosses the UBI threshold, the church owes tax on it at corporate rates (currently 21%). More importantly, if UBI becomes a substantial portion of the church's total income, it could jeopardize the church's tax-exempt status entirely. Churches need to track these income streams carefully and understand which ones are safe and which might trigger a tax obligation.