Taxing churches: the devil is indeed in the details

Near my first church in a rural area with a population of turkeys and deer far larger than people (a few bearded, cranky old gobblers who were members of my wonderful church I count in the latter number) there was an old Methodist church building, vacant save for one service per year when former members would come and have a nostalgic service.

The building was small, had a simple frame construction, no accoutrements like stained glass windows, heat or air conditioning. It had just the sanctuary and a couple of small adjacent rooms. I suspect that the entire building and every stick of furniture in it was constructed by members with volunteer labor.

We have certainly gone way beyond that in our church buildings and amenities.

In addition to the usual sanctuary, office, and educational spaces churches by the tens of thousands have recreational facilities both indoor and outdoor. Back in the 1970s I was member of a church that had in addition to a basketball court, a bowling alley, snack bar, fitness room.

Fast forward to now and you can find megachurches that have all of the above plus coffee shops, bookstores, food courts, and who knows what else.

Here's a question: When churches have revenue producing components (coffee shop, snack bar, bookstore health club, etc.) should they lose some of their property tax exemption and be taxed?

Maybe. Maybe not.

Take a look at the case where Nashville tax authorities have won a case against a pentecostal megachurch:

Megachurch denied property tax exemption for gym and bookstore/cafe

Taxing the third space

These links are summary pieces by my blogging CPA friend Peter Reilly who does a good job scrutinizing some aspects of taxation concerning churches and ministers.

The megachurch involved had a fitness center which was not only used by members (for a small annual fee) but also by non-members who bought membership into the center. The bookstore/cafe was a commercial enterprise that sold various types of the liquid delivery system for our only approved drug, caffeine, and also assorted books, religious and other, and the usual 'Jesus junk' impulse items.

For this their property's tax exemption was cut from 100% to 93%. They sued. So far the church has lost but intends to appeal.

The church makes a reasonable case that these commercial activities (for which they claim not to have made a profit) are part of their religious mission to provide safe "third spaces" for not only members but others in the community.

The tax assessors responded with the cogent point that virtually any use could be subsumed under such a broad "third space" principle.

Indeed. How about an authentic "Cheers" bar for some among us who would expand the drug delivery by adding alcohol, in moderation of course? Now that would be some kind of third space.

How about a full service restaurant featuring holy ham hocks or some other religiously labeled dish (fried chicken might work in a Baptist church but there's a lot of competition there)? You get the picture.

The church in Nashville maintains that colleges have commercial bookstores with coffee shops and non-profit hospitals have health clubs, so why shouldn't churches be granted the same?

Not a bad point. Hmmm, this church taxation business is not so simple as it used to be.

The modern megachurch is far from the plain country church I described above. Apart from receiving tithes and offerings, they can be and often are huge revenue generators. Instead of taking love offerings, churches often sell tickets, have box offices for events, and even sell premium VIP tickets for patrons who want closer contact with the latest Christian celebrity. Bookstores and coffee shops are almost de rigeuer for the megas nowadays. No self respecting mega would be without those.

At some point, we Christians might help ourselves by not expecting to be completely tax exempt and do what Starbucks or Anytime Fitness has to do - pay some taxes and level the commercial playing field somewhat.

We will see where this goes. Since almost all churches are completely tax exempt already, there is only one way this can go.

BTW, I happen to have a third space myself - the Subway restaurant in town where the folks are really friendly and I can go retro and read a printed newspaper and drink unsweet tea. Everyone there knows my name: "preacher." They pay taxes. I'm glad to help them do so with my business.

Our sacred tax loophole, the housing allowance, survives once again

Suit against housing allowance dismissed


We ordained clergy like our tax break, the minister's housing allowance, because it makes us feel so special, that, along with not paying some of our taxes. The housing allowance permits us to exclude some of our income from income tax. GuideStone explains it here.

The minister’s housing allow­ance is among the most important tax benefits available to ministers. Section 107 of the Internal Revenue Code allows “ministers of the gospel” to exclude some or all of their ministerial income—as designated by their church or church-related employer—as a housing allowance from income for federal income tax purposes.

Not only that but when we take the housing allowance on a house we are buying and for which we have a mortgage, we get a double tax break by (1) being able to exclude income spent on housing (mortgage, repairs, furnishings, taxes, insurance etc) from W-2 wages, and (2) use interest expenses a second time if we itemize deductions. I know of no legitimate justification for this tax break, but then who said tax policy in this country had to be legitimate, sensible, or fair?

What a great country anyway!

Lest we become too proud the gummit insists that we pay Self Employment taxes on the amount of the housing allowance. Truth is, most SBC clergy pay far more in SECA taxes that income taxes.

Of all the issues raging in the SBC these days - Mohler on homosexuality, Great Commission Resurgence stuff, changes at NAMB, the runup to the 2012 election - what really counts for the bank accounts of SBC pastors and clergy might get lost.

Plodder is happy to keep the brethren/sistren informed.

Why clergy should lose their tax break

Ordained clergy get a tax break through the housing allowance which allows them to exclude expenses on their home. This is true in the case of an owned home, a rented home, or even if the minister lives in a pastorium.

I'd guess that most SBC clergy, folks who have been known to lay awake at night worrying about a ten dollar bill, are keenly aware of and take advantage of this break. Actually, it's a double break in some cases, since the minister gets a deduction on the interest paid on a mortgage and he gets to deduct that a second time because the part of his compensation used to make those payments is paid as a housing allowance, not taxable as income or included in his W-2.

We don't write tax laws. We certainly need not feel guilty for doing what the law allows. I'm all for paying only the tax I owe and not for paying a dime of tax that I don't owe.

But it may surprise folks to understand that if the minister has two homes, he can even use his vacation home in the mountains or at the beach for the tax break.

Megapastors, Christian music rock stars, and televangelists take notice. You don't have to squeeze your membership or viewers for so much money. Poor taxpaying saps can subsidize your multi-million dollar beach condo.

Phil Driscoll, trumpeter (earlier jailed for tax evasion) can be thanked, or blamed, for that. The case is here. The summary below is from the Georgia Baptist Convention:

Phil Driscoll owns two homes. One in Cleveland Tennessee and a lake home outside of Cleveland Tennessee. Phil Driscoll is an ordained gospel minister. Phil Driscoll Ministries paid for both homes and it was excluded from his income under the Pastor's Housing allowance under Section 107 of the Internal Revenue Code of 1986. The IRS felt that to be a bit greedy and assessed him with additional income and fraud penalties.

Rev. Driscoll took the IRS to tax Court. The IRS argued that the use of the word "home" in Section 107 refers only to one home. Rev. Driscoll countered that in Section 7701(m) the Code provides that singular may include plural. Further, the legislative history did not forbid that interpretation. For those reasons the Tax Court ruled in Driscoll, et ux v. Commissioner, 135 TC 27 (2010) that both houses were homes for the purposes of Section 107 and both could be excluded from income.

This double tax break when expanded to multiple homes, cannot possibly be justified and surely some legislative watchdog will push to amend or repeal it. One can hardly object to that.

What a great country! Some high flying ordained ministers get to have taxpayers subsidize their second homes. We may one day lose this tax break (it isn't exclusive to clergy, military receive it as well) because of how it has been greedily applied.