Can a church lose its nonprofit status?
Did you know that nonprofit organizations (including churches) have more stringent IRS requirements than for-profit businesses?
Sure, they get great tax breaks. And the Housing Allowance for ministers is still one of the best benefits you can give.
But the government wants to make sure your organization is truly “not-for-profit”.
To do this, they mainly look for one thing.
This one thing is called "private inurement".
But what in the world is “private inurement”?
Here’s what the IRS has to say...
A section 501(c)(3) organization must not be organized or operated for the benefit of private interests, such as the creator or the creator's family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization.
In other words, the church should be run for and in the interest of the public, not for private interest. And no person with power or control at your church can receive more benefit than he or she provides to the church. This is called “excess benefit” to a “disqualified person”.
A disqualified person is any person or anyone directly related to a person with power, influence, and control over decision-making in the church. A few examples include:
Members of boards or committees
Pastoral staff or managers
So please be careful when providing any sort of compensation to individuals in your church who may fall under these descriptions.
But private inurement and excess benefit can be difficult to understand. To make this more clear, I’ll provide a few examples of private inurement or excess benefit to disqualified persons:
Providing compensation to a pastor that is higher than what is considered “reasonable”.
A pastor makes budget decisions alone, including regulating his own salary.
Allowing a church member to use a music room for free to teach music lessons for which she charges.
Requiring church staff to only use a certain member’s business for it’s purchases and referrals.
Selling a church asset to an employee or member at a discount to its actual worth.
Paying a member’s business more than fair market value to perform work.
As you can see, these things can happen very easily in the day-to-day life of a church. Take some time to look at what your church is doing. Create policies and procedures to help avoid falling into these traps. The consequences can be devastating.
Not only can the church be held liable, but so can the key decision-makers involved.
Individuals can be fined huge amounts and even jailed!
Over the next few blog posts, I’m going to delve into many of the common mistakes churches make when it comes to payroll and compensation. I’ll give some pointers for avoiding those mistakes to keep your church on the right side of the IRS.