One of the more common questions I field from church boards is whether they can host a wedding, run an annual fair, or hold a garage sale without putting their tax-exempt status at risk. The incidental use of church property for events like these is usually fine, but the answer depends on how the activity is run and how the income is generated. Get it wrong often enough, and a church can find itself owing tax on money it assumed was exempt
Exclusive Purpose:
The Exclusive-Purpose Rule
Under federal tax law, a church is tax-exempt because it is organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes. This is often called the exclusivity-of-purpose rule, and it means the church’s assets must be used to further its exempt purposes, not to benefit private interests. A church cannot use its assets to support a political candidate, engage in substantial lobbying, or provide excessive compensation to its leaders. That much is settled.
The harder question is what happens when the church lets its building be used for something that is not, strictly speaking, a religious function.
What Counts as Incidental Use of Church Property
The incidental use of church property refers to the use of a church’s facilities by individuals or groups for activities that are not directly tied to worship, such as a wedding reception, a community meeting, a fundraising fair, or a garage sale. Whether and how the church may allow this depends on its own policies and on local rules, and churches vary widely, some keeping tight control over their facilities and others being far more open.
Two issues come up every time. The first is liability: whenever an individual or outside group uses church property, someone can be injured or something can be damaged, and the church needs proper insurance in place to protect everyone involved before the event, not after. The second is tax, which is where most of the confusion lives.
How UBIT Actually Works
The tax question turns on the Unrelated Business Income Tax, or UBIT. Income a church earns can be taxable as unrelated business income when three things are all true: the activity is a trade or business; it is regularly carried on; and it is not substantially related to the church’s exempt purpose. Whether something is regularly carried on looks at how frequently and continuously it runs, compared to a commercial business doing the same thing. A once-a-year fair looks very different from a store open every weekend.
If all three parts are met, the income can be taxable. But the church-friendly part of the law is a set of specific exceptions, and most ordinary church activities fall into one of them.
The Exceptions That Save Most Church Events
Three exceptions do most of the work for churches. First, the volunteer labor exception under IRC section 513(a)(1): if substantially all of the work is performed by unpaid volunteers, the activity is not an unrelated trade or business at all. A bake sale or a fair staffed by church members typically qualifies.
Second, the convenience exception under section 513(a)(2), which covers activities carried on primarily for the convenience of the church’s own members. Third, and most useful for garage sales, the donated-goods exception under section 513(a)(3): selling merchandise, substantially all of which the church received as gifts or donations, is not an unrelated trade or business. This is the same thrift-shop exception that lets charities run donation-based resale operations tax-free, and it is why a church rummage sale of donated items generally raises no UBIT concern.
There is also a modest cushion built in: a church generally gets a specific deduction of the first $1,000 of any unrelated business taxable income before tax applies.
The Practical Takeaway
For the everyday case of incidental use of church property, an occasional wedding, a once-a-year fair run by volunteers, or a garage sale of donated goods, the incidental use of church property rarely creates a tax problem, because it either is not regularly carried on or falls squarely within one of the exceptions. The situations to watch are the ones that start to look like a real, ongoing commercial business: a facility rented out for events week after week, or a resale operation buying inventory rather than accepting donations. Those are worth reviewing with a qualified tax professional before they grow into a liability.
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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.
