Sunday, April 8, 2018

Churches, Taxes, and Nonprofit Treatment

Every so often, the issue of tax-exemptions for churches and religious organizations in the United States comes up and raises a bit of ire. Of course, at least for the time being, it usually comes up because of an occasional meme floating around Facebook and Twitter, and not because of serious attempts by those in government to call the tax exemptions of religious organizations into question.

But what about tax exemption of churches and religious organizations? Isn’t this unfair special treatment? Shouldn’t pastors have to pay taxes on their income?

My goal here is to explain a bit about tax exemption for religious organizations, clear up a few misunderstandings, and hopefully improve the conversation about how to handle taxes and religious organizations by getting us all on some common understanding about the situation.

The first thing to note is that when we talk about tax-exemptions for churches and other religious organizations, really two different tax statuses are at play, not just one.

Tax-Exempt Status: Tax-Exemption At The Entity Level

The broader category of tax exemption applies at the entity level. And in this regard, there is nothing special about churches and religious organizations at all. Many kinds of organizations fit the requirements are tax-exempt. Others include secular charities, universities, political organizations, Elks lodges, sports leagues, labor unions, fraternal societies and many other kinds of organizations. It is not a matter of privilege for churches but simply fair treatment (although the Constitution does arguably create a degree of privilege due to the First Amendment’s protection of religious freedom). To not give them tax-exemption at the entity level would be to discriminate against these organizations specifically because they are religious.

What then does it mean for an entity to be tax-exempt? This tax-exemption means that an organization that is tax-exempt does not have to calculate income and pay taxes on it like a for-profit business. A normal business takes in money (revenue) in exchange for goods and services, subtracts money paid out in the course of business (expenses), and if revenue exceeds expenses, the business has earned a profit (net income) and pays an income tax on that net income. How this plays out depends on the type of business entity (sole proprietorship, partnership, corporation, etc.), but you get the idea. Tax-exempt entities, however, do not pay taxes on this net income.

Why do tax-exempt entities not pay taxes on that income? The general rule is that these organizations do not exist to earn a profit, and profits they do earn stay in the organization instead of being paid out to owners or stockholders. These organizations don’t even have owners or stockholders to give profits to in the first place.

For a normal business, there is an owner or owners/stockholders who are entitled to the net assets of the company and the net income earned. If a corporation has a great year and earns huge profits, those profits can be paid out to the owners (stockholders) in the form of dividends. For a not-for-profit entity, there are no stockholders. You can’t buy or sell a share in the organization. The assets and income don’t belong to you or anyone else. They have to stay with the organization itself, and there are laws about what such organizations must do with net assets (after they pay their debts) if the organization dissolves. And if a nonprofit organization were to start paying out large amounts of its net income to interested parties (beyond the extent of reasonable wages for services rendered), kind of like a for-profit business paying dividends to its shareholders, the organization could potentially get in trouble with the government and even lose their tax-exempt status.

All that is to say that there is criteria for being tax-exempt at the entity level, and churches and religious organizations generally meet it (there are explicitly for-profit religious organizations that pay taxes but that is another story). So even apart from any argument in favor of granting them special privileges on First Amendment grounds, as some do, exempting a nonprofit entity like a church from business income taxes just makes good sense based on the rules in place. To argue that because they are religious they should not get the tax benefits that other similar organizations get is to actively discriminate against them, not simply decline from giving them special privileges.

Additional Tax-Exempt Status: Tax-Deductible Contributions to the Organizations

Now, there is an additional tax benefit beyond just tax exemption that religious organizations can use, and this benefit is more limited (although it still applies to many types of secular organizations as well).

Churches and religious organizations can receive an advantage reserved specifically under the Internal Revenue Code §501(c)(3). You have probably heard the term “501(c)(3)” before, and this is what it refers to. If you donate to an organization under IRC §501(c)(3), not only does the organization not have to pay income on its net proceeds (donations minus expenses), but those who make contributions get to deduct the money they donate from their taxable income (subject to several limitations). Since income tax in the US is based on taxing percentages of your taxable income, the lower your taxable income is, the less tax you have to pay. This reduction in taxable income helps make up for some of the cost of donating to the organization, and this encourages people to donate. This, in turn, benefits the 501(c )(3) organization by increasing donations to them.

For example, let’s say somebody donates $1,000 to a 501(c)(3) organization. They can deduct that $1,000 from their taxable income. If their marginal tax rate is 25%, they would have paid $250 in tax on that $1,000 had they not deducted it. This means that they get $250 back on their taxes because they donated. As a result, that $1,000 donation really only cost them $750 ($1,000-$250). So if they only had $750 to give, they could give $1,000 due to the tax benefit. This means the organization got $250 than they otherwise would have. That is a pretty useful tax benefit for an organization that depends on donations.

Religious organizations are specified under IRC §501(c)(3), so if you are a church or a synagogue or mosque or theology organization or whatever else, you can apply for 501(c)(3) status and donations to you can be tax-deductible to those who give.

Now, this benefit is not only reserved for religious organizations. IRC §501(c)(3) is one giant sentence, but it also includes educational organizations (e.g. universities), amateur sports (e.g. kid’s soccer), charities (religious and secular), organizations that pursue scientific research, and organizations that exist for the prevention of cruelty to animals. The basic idea being, if it is an organization that in some manner is used to benefit public welfare, people should be encouraged by the tax code to donate to them.

Here, one might argue that even if religious organizations should have tax-exemption out of fairness, it should not get this special designation. Fairness does not require it to the extent that it requires simply tax-exemption at the entity level.

That said, I think the benefits of IRC §501(c)(3) are broadly applied enough that it makes sense to include religious organizations. Contrary to popular belief, the 501(c)(3) benefit is not only for charities that feed the hungry and clothe the poor (although many churches and religious organizations do that as a part of their work). Because it applies to all sorts of entities that can have a broader, less defined benefit to society (like kid’s sports or a university that teaches some person I don’t know about classical philosophy), religious organizations would seem to fit the bill.

One might argue that because religion is controversial, and different religions conflict in their teachings, religious organizations broadly should not be considered beneficial to society, even if one religion is actually true. However, with other organizations and causes, there is no requirement under the code that entities all teach the same things or do not conflict with each other in their beliefs or even in their actions. That is why conservative and liberal universities alike are covered. That is why Feminists for Life and National Right to life are 501c(3) organizations but so is Planned Parenthood. And that is why even pro-atheism organizations like American Atheists and The Freedom from Religion Foundation are 501(c)(3) organizations with all the same tax benefits as everyone else here. The tax code lets the different, conflicting groups all have the tax benefit and lets the people decide whom they think is worth donating to.

It Is Not True That Pastors and Clergy Are Exempt From Paying Taxes

Some people think that pastors do not pay taxes, but that is simply inaccurate. Like the employees of any tax-exempt entity, their income is still subject to income tax like everyone else’s.  Insofar as the money taken in by tax-exempt organizations is paid to employees, that money is taxed in the form of individual income tax levied upon the employee who earns it. Money just isn’t taxed at the organization level when the organization earns it (as it would be in a for-profit corporation).

Now, because of the unusual nature of a clergy job (not just Christian), there are certain tax provisions that apply specifically to them. And there can be some benefits to this. For example, for some clergy (not just Christian), sometimes a church or similar entity can provide housing or a housing allowance, subject to limits, and the clergyman does not have to report this as taxable income. Clergy are not the only sort of employee who get some form of employer-covered housing that is not subject to income tax, but this is certainly a great potential tax benefit to being a pastor.

Despite some benefits, pastors do still have to pay income taxes like everyone else. So while a handful of charlatans may make millions of dollars by lying to people in the name of religion, they still have to pay taxes on it – no matter what those memes you saw on Facebook say.

Churches are tax-exempt. Pastors are not.

Churches and Religious Organizations Actually Do Pay Some Taxes

Churches and religious nonprofits can get out of income tax at the federal level and probably in most (if not all) states. However, they may be subject other forms of taxation common to businesses.

For example, most religious nonprofits have to withhold and remit FICA taxes (Social Security and Medicare) and also pay a matching amount on their employees’ behalf, same as every other employer. Churches specifically have some unique rules when it comes to FICA, but most will have to at least pay the standard employer portion of FICA taxes for any non-minister employees.

Churches and religious nonprofits may also be subject to sales tax and other taxes levied at the state level. As you might imagine, this varies by state.

Nonprofits, including churches, can also potentially owe tax on what is called unrelated business income (UBI). In a nutshell, if a nonprofit engages in a trade or business beyond what is incidental to their mission, they may be required to pay taxes on the income earned. This doesn’t come up too often with churches, as there are exemptions and threshold requirements (the first $1,000 of otherwise taxable UBI is not taxed). But a nonprofit cannot create or buy a business arm and expect to be able to engage in that trade with no taxes. So a church couldn’t create a clothing line or buy an ice cream shop and expect to not have to pay taxes on what is clearly business income.

Sunday, July 2, 2017

Do Millennials Delay Adulthood Because We Have Been Told So Often About How Terrible Adulthood Is?

It is no secret that those in my generation, the millennial generation, have been known for trying to extend adolescence and the simple joys of youth well past the point where past generations would have settled down, married and had kids, and otherwise started doing things we associate with being a real grownup.

Of course, this is by no means universal and is probably overplayed. But it does seem true that it is more common for people in my generation to delay things like marriage, child-bearing, home ownership, and other milestones of adulthood. The trope of men in their late twenties or early thirties who go to work in the day to pay the bills and then return to the apartment or house they share with multiple roommates and play video games until bed is not based on nothing.

The other day I saw something, a meme specifically, that got me thinking: could part of the reason millennials aren't so quick to fill the traditional roles adulthood (marriage, kids, demanding career) is because older generations have been so quick to tell millennials how terrible life is when you get older? From our pessimistic parents lamenting how life is just always out to get you, to older adults taunting younger adults about life only gets way harder, could it be that somewhere along the line, younger people just got to thinking that if older people seem so unhappy, maybe it makes sense to not live like older people do? If all you hear about marriage is how much married people don't like each other and either tolerate each other or get divorced, might that take some of the luster out of marriage? If all you hear about having kids is how hard and draining and life-consuming it is, is it crazy to think that maybe it isn't for you? If all we heard is how much it sucks to adult, then is it any wonder why we aren't so quick to start adulting?

I mean, there are surely other factors to take into account. The great recession and broader economic declines that began even before it have made it much more difficult for millennials to get a real job and get their lives going. Helicopter parenting and participation trophy culture have created more and more young adults who have trouble dealing with disappointment. The decline of Judeo-Christian values and religion in America surely comes into play. Marriage seems less necessary when pre-marital sex is acceptable - although we can largely thank baby boomers and to some extent their parents for making this so. And there's also simply the fact that as people live longer and the world changes, it makes sense and isn't necessarily a bad thing that people don't jump fully into complete adulthood at as young of an age. In ancient times, it was normal to marry and have kids in your early to mid teens because life expectancy was low and the world was a different place. But no one is stressing about women being old maids because they are unmarried at age 20 because what worked then isn't what works now.

Nevertheless, I think the pessimism and negativity of baby boomers plays into it as well. Why wouldn't it? If all you ever hear growing up is how life will just make you miserable, how the best days of your life are when you're young and can play video games all day, how being an adult with kids and responsibilities to others sucks, why would you be eager to jump into that world. The same people in their 50s and 60s who think they are so clever with memes addressing young people saying "life hasn't even begun to f**k you over yet" are the same people who lament that people in their mid-twenties choose to live a different life than they did. If life is so much better when you have no kids and live with roommates and play video games after work, why should we be shocked that people in their mid-twenties do that instead of marrying the first person who will take them and start having kids at age 22 because of some vague societal expectations that don't even really exist anymore?

Of course, perhaps life isn't actually better living with roommates and playing video games. Although that life is easier and more fun, maybe being a real grownup and getting married and having kids and following that path actually makes life more worth living. Maybe just because life gets harder when you have kids and get married doesn't mean that life doesn't also get better. Some older people (older than me at 28 I mean) have said as much to me. Maybe if the attitude was more along the lines of "the best things in life take work and sacrifice to have" and less "you may think life sucks now but this is the best it will ever be," millennials might be more willing to follow int he footsteps of past generations. Maybe if the same people who lament millennials waiting to grow up more than is necessary weren't the same people taunting millennials with how life only gets worse as you grow up, maybe millenials would be more eager to grow up?

Wednesday, October 5, 2016

Prolepsis and the Bible: When Future Events Are Spoken of As Current Reality

There are times when future events are described as being present realities. This is true in life and in the scriptures. And this is especially important when evaluating any argument made that because the Bible speaks of something in the present tense, it therefore is saying that whatever is being spoken of is in fact a present reality.

The technical name for this phenomenon is prolepsis. The idea behind prolepsis is quite simple. Merriam-Webster defines it primarily as “the representation or assumption of a future act or development as if presently existing or accomplished.”

Tuesday, September 20, 2016

How To Be Convicted Without It Being Meaningless

If you've been in church for a while, you may be familiar with people talking about being convicted about things. Rather than describing part a criminal proceeding, it refers to when someone has a deeply felt moral view, regarding a specific issue. Sometimes it comes with feelings of guilt leading to repentance. Other times, it is less a matter of guilt and more a strong, heart-felt sense that God has opened your eyes. Whatever the case, people talk about being convicted all the time after hearing certain sermons, reading certain books, having certain experiences etc. Last Sunday at my church, there was a sermon on the book of Amos so I can only imagine how many times the word "convicted" has been used int he last 24 hours by people I know.

Sometimes, people getting convicted is great. Sometimes, it leads to repentance of sin, spiritual growth, righteous deeds, and other very good things. Who knows what good fruit will arise from Sunday's Amos sermon?

And sometimes, people feeling that they are convicted is meaningless. Sometimes it is little more than guilt for the sake of guilt that doesn't lead to any fruit at all. In some cases, this so-called conviction, which is supposed to be from God, never could lead to any fruit in the first place - at least not fruit that resolves the underlying issue which the person was convicted about.

Thursday, May 12, 2016

Are You Even Trying Not to Sin?

"For this is the love of God, that we keep His commandments; and His commandments are not burdensome. For whatever is born of God overcomes the world; and this is the victory that has overcome the world—our faith" (1 John 5:3-4, NASB).

If you are a Christian, are you even trying not to sin?

This question was originally going to come up as part of a larger series on theology of sin. However, I don’t think that whole piece will be finished anytime soon, and I realized this was a question worth asking even before all my ducks are in a row on that front.

Friday, April 29, 2016

Joyce Meyer, Forgiveness, and the Ungodly Way that Too Many Christians Deal With Sex Abuse

I usually try not to comment about controversial things in social media environments. It usually is fruitless and it ends up just being a stressful, frustrating waste of time.

But sometimes, people hit a nerve and cross a line with me. 

In the linked article on, we are told about Joyce Meyer opening up about her father raping her when she was younger. Many comments I could relate to. But some I found outrageous. And they weren't outrageous in the normal social media way. No one was telling her that she probably wanted it or was making outlandish and blasphemous statements about human sexuality that incorporated religious imagery. There weren't even any Christians chiming in that she's a heretic, which surprised me.

No, the comments that really made me mad were comments that were in some way really trying to be godly and biblical. That probably is what made me detest them the most.

While it is no secret that the Roman Catholic Church has rightfully gained a reputation for being shockingly bad at dealing with sexual abuse, the rest of Christendom doesn't exactly have a stellar reputation to boast about either...

I left a lengthy comment, and with the background info I just gave, I think the comment I left does a good job of saying what I needed to say:

Tuesday, March 8, 2016

Sensitivity Is Needed When Utilizing the Old Testament

Since the early days of Christianity, when we no longer had apostles who could authoritatively answer questions, believers have debated exactly how to handle the Old Testament. With the exceptions of heretical groups like the Marcionites (whose beliefs about the OT have unfortunately resurfaced some in recent years), it was acknowledged that it was the word of God. 

However we as Christians are in this tension where certain parts seem to contradict what we believe as Christians. Of course, the skeptic or the liberal or so-called red-letter Christian would simply say that the Old Testament does indeed contradict the New Testament, as well as itself, but we aren't in a position where we can agree. This tension between Christianity and the Old Testament, the bulk of the very scriptures upon which Christianity is based, is nothing new.