Unrelated Business Income Tax applies to churches whenever they earn money from a trade or business that is regularly carried on and not substantially related to their exempt religious purpose. Even though churches are broadly exempt from federal income tax, that exemption is not unlimited. According to the IRS, income qualifies as Unrelated Business Income Tax liability when three conditions are met: the activity is a trade or business, it is regularly carried on, and it is not substantially related to the church’s exempt purpose. A church with $1,000 or more of gross income from an unrelated business in a given year must file IRS Form 990-T and may owe estimated tax if the liability reaches $500 or more.
What Counts Toward Unrelated Business Income Tax
Whether an activity counts toward Unrelated Business Income Tax depends on the actual facts, not just how the activity is labeled internally. A facility that is necessary for a church’s exempt functions does not automatically escape Unrelated Business Income Tax simply because it also serves a commercial purpose part of the time. The test is whether the commercial portion of the activity contributes importantly to the church’s exempt purposes.
Income that is purely incidental to that purpose, such as occasional use of a kitchen by outside groups on a break-even basis, is treated differently than a regularly operated, profit-generating side business. The IRS’s official guidance on unrelated business income walks through this test in detail, including a long list of specific examples.
Rental Income and Unrelated Business Income Tax
Rental income from real property is generally not treated as Unrelated Business Income Tax liability, which is good news for churches that lease out unused space. However, this exception has real limits. If a church specifically borrows funds to acquire or improve income-producing property, the rental income becomes taxable in proportion to the debt used to finance it. This is known as debt-financed income, and it is one of the most common ways well-meaning churches unexpectedly trigger Unrelated Business Income Tax. A church considering a mortgage to purchase a rental property, rather than paying cash, should factor this rule into the decision before signing.
Common Activities That Trigger Unrelated Business Income Tax
Several everyday church activities can raise Unrelated Business Income Tax questions if they are conducted regularly and commercially. Charitable gaming, such as bingo, is one of the most common examples, though bingo income is generally excluded from Unrelated Business Income Tax when state and local law permits the game and no for-profit organization runs the same type of game locally.
Leasing a cell tower site on church property is another frequent trigger, since the payments can be treated as debt-financed or non-rental income depending on how the arrangement is structured. Selling advertising space in a bulletin, website, or newsletter is generally treated as Unrelated Business Income Tax liability, since it is a commercial activity distinct from a church’s exempt mission.
Filing Requirements for Unrelated Business Income Tax
A church expecting $1,000 or more in gross unrelated business income for the year must file IRS Form 990-T. Estimated tax payments are generally required if the church expects its Unrelated Business Income Tax liability to be $500 or more for the year. Form 990-T is due on the same schedule as Form 990, and, like Form 990, portions of it are subject to public disclosure. Keeping clear, contemporaneous records of which activities are mission-related versus commercial makes this filing process far more manageable and reduces the risk of a costly reclassification later.
New Deductions That Can Reduce Unrelated Business Income Tax
The One Big Beautiful Bill Act, signed into law on July 4, 2025, permanently reinstated 100% first-year bonus depreciation for qualified property placed in service after January 19, 2025, and increased the Section 179 expensing limit to $2.5 million. The IRS issued formal guidance on these depreciation provisions in early 2026. For churches with tangible assets connected to an unrelated business activity, such as equipment or improvements tied to a debt-financed rental property, these expanded deductions can meaningfully reduce the taxable income subject to Unrelated Business Income Tax. Churches evaluating a new income-producing activity, or reviewing an existing one, should factor these updated depreciation rules into their planning rather than relying on outdated assumptions about what can be deducted.
Getting Help With Unrelated Business Income Tax Questions
Because Unrelated Business Income Tax turns on specific facts, such as how an activity is financed, how regularly it is carried on, and how closely it relates to a church’s exempt purpose, getting an early read from a qualified tax professional is usually far cheaper than an after-the-fact correction. This is especially true before taking on debt to acquire income-producing property, launching a new recurring fundraising activity, or leasing space to an outside business on an ongoing basis.
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Disclaimer: Every situation is different and particular facts may vary thereby changing or altering a possible course of action or conclusion. The information contained herein is intended to be general in nature as laws vary between federal, state, counties, and municipalities and therefore may not apply to any given matter. This information is not intended to be legal advice or relied upon as a legal opinion, course of action, accounting, tax or other professional service. You should consult the proper legal or professional advisor knowledgeable in the area that pertains to your particular situation.
