Perilous Financial Ventures

By James E. Guinn
Guinn, Smith & Co., Inc., Certified Public Accountants

Churches that turn to get-rich-quick fund-raising methods may be treading on dangerous ground. Where does a church turn when the money it needs doesn't seem to be there? Many church leaders have been enticed by promises of effortless, bounteous revenues by promoters of get-rich-quick schemes, multi-level marketing programs and other commercial ventures. These fund-raising methods generally involve motivating church members to use a company's services or sell its products and then to recruit others into the program. While promoted as an easy way to fill church coffers, at the core of these plans is frequently a commercial enterprise seeking only to increase its profits and expand its markets.

Donations? Royalties? Commissions?

As church members buy the products or use the services, the church is typically paid a percentage of the sales. The promoters may call this a donation, royalty or commission. But whatever they may call it, the IRS calls it taxable income to the church -- "unrelated business income." Since this is considered taxable income, the church must file a tax return (a Form 990T). It is perfectly legal for a church to have unrelated business income, as long as: It's not a substantial part of the church's total revenue; and the income is properly reported to the IRS and the taxes are paid. If, however, such revenue does become a substantial part of the church's revenue, the church is then considered primarily a business making its tax-exempt status no longer valid.

Many nonprofit organizations are not aware they must pay taxes on unrelated business income. A June 1995 article in USA Today estimates this untaxed income by nonprofit organizations at $30 billion, not counting that generated by churches. As one might predict, the IRS has taken notice and begun to target such activities for audits. Dangerous ground.

While churches may not like the prospect of having to pay taxes on this income, there is a far worse danger: losing their tax-exempt status. A common scenario involves officers or directors (known to the IRS as "control parties", these are also now called "disqualified persons") personally benefiting from use of the church's assets while they participate in the money making program. (See discussion of intermediate sanctions) This is absolutely forbidden and is grounds for revocations of the church's exempt status. Examples include using the church's mailing list, personnel, meeting rooms or other assets for the commercial venture.

If these potential consequences aren't bad enough, pastors should consider another danger of having the church engage in commercial activities: "customer (parishioner) satisfaction." Having given his or her endorsement, the pastor is likely to be blamed by church members when the program fails to deliver the promised financial windfall or even when the products or services turn out not to be as advertised. Although I have seldom seen a get-rich-quick plan live up to its advertising, I have often seen discord, finger pointing and angry church members.

What the Bible says.

Scripture teaches us that God wants the church supported by the tithes and offerings of His people. In 25 years of reviewing the financial records of thousands of churches and ministries, I have discovered that only a small percentage of Christians follow the biblical principle of tithing. In most churches, about 20 percent of the church members provide 80 percent of the revenue. God's fund raising plan--tithing--should be the foundation of the church's financial strategy. Churches would flourish financially if their members simply tithed--and there would be no need to turn to commercial ventures to fund church ministry. God's work, done God's way, will never lack God's provision. But church leaders should be wary of steering the church into commercial enterprises that promise easy money.

By James E. Guinn, CPA James Guinn is a certified public accountant with the firm of Guinn, Smith & Co., based in Irving, Texas.