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Are there any tax ramifications if two non-profit churches

set up an LLC to...
Are there any tax ramifications if two non-profit churches set up an LLC to hold and manage a property lease that both churches share?
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Answered in 7 minutes by:
7/27/2013
Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 15,892
Experience: 15years with H & R Block. Divisional leader, Instructor
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Robin D :

Hello and thank you for using Just Answer,
Churches and religious organizations may engage in income-producing activities unrelated to their tax-exempt purposes, as long as the unrelated activities are not a substantial part of the organization’s activities .
The church opens itself to Unrelated Business Income Tax.
In general, rents from real property, royalties, capital gains, and interest and dividends are not subject to the unrelated business income tax unless financed with borrowed money. If a church rents out property on which there is debt outstanding (for example, a mortgage note), the rental income may constitute unrelated debt-financed income subject to UBIT .


Robin D :

A church can own a business but if a church engages in business activity that incurs UBIT, it has to fill out Form 990-T each year and report its income and pay whatever tax is due.

Robin D :

The IRS has a Publication for churches. If you have not ever seen it you may find it very helpful
http://www.irs.gov/pub/irs-pdf/p1828.pdf

Robin D :

I sincerely XXXXX XXXXX information is helpful and thank you in advance for a positive rating.

Customer:

Thanks. To further clarify, the two unaffiliated churches are sharing a lease for space that they will share. They would like to set up an LLC, with each church as an equal partner. The LLC would manage the property, pay expenses and rent, etc. The churches would fund the LLC equally to cover the expenses. In this way the LLC is simply operating as a pass-through organization. It doesn't make a profit. So it would seem to me there is no UBIT, because there is no outside party involved. Is this correct?

Robin D :

The UBIT would be if the church were renting its property for profit. There would not be any UBIT if it were not receiving income from the venture.

Customer:

The churches would not be receiving any income from the venture, but at the end of the year the LLC might have an excess of money received from the churches and the rent/expenses paid to the landlord. So if the LLC shows a profit on its 1065 which passes through back to the churches, is that UBIT? If this is all too weird, would you suggest a different structure between the two churches?

Robin D :

If they both enter into an LLC it would be a partnership and would require filing by the partnership. The UBIT would not be generated because the churches would have their investments in the partnership and it would be a return of that.
I am not sure that forming a business entity would best serve the churches. They should have clear space-sharing agreements that include items such as: what space is being shared, what the costs are, what the time period of the agreement is, how either party can terminate the agreement, how late payments will be treated, what insurance (or proof of insurance) space-sharers must have, what rules and policies govern behavior in the building.

Robin D :

I have to admit this is one question that has not come up yet for me personally.

Robin D :

I am checking every document I have that relates to churches and taxation.

Robin D :

Most items that even relate to what both wish to do deal more with a written covenant and not forming an entity to accomplish this.

Customer:

We are preparing an Operating Agreement (covenant) for the LLC that will cover all the shared use issues. This whole arrangement is simply for convenience and management. We can open one independent checking account, have a Board with representation from both churches, hold money from each church in escrow, etc. There is no profit motive. So based on what you have said, I think we are ok and will go ahead with it. Thanks so much for your extended time and insight. Dan

Robin D :

You are most welcome and best wishes to both congregations.

Robin D :

Your positive rating is always thanks enough.

Customer:

will do.

Robin D :

Thanks again

Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 15,892
Experience: 15years with H & R Block. Divisional leader, Instructor
Verified
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Category: Tax
Satisfied Customers: 15,892
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