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A denominational agency publishes educational resources for affiliated churches and pastors. It also publishes religious books that it markets to the general public. Some of these books have been best-sellers, and have resulted in substantial earnings. The denomination uses these earnings to further its religious purposes. Should it be concerned about the application of the federal "unrelated business income tax" to these earnings?

Take the quiz first, then read the article for all the details.

1. A tax-exempt organization is not taxed on its income from any activity that is substantially related to the religious, charitable, educational, or other purposes.
   True or False
   
   
2. If a denominational agency regularly carries on a trade or business that is not substantially related to its exempt purpose, it may be subject to the federal "unrelated business income tax" on any net earnings that it generates.
   True or False
   
   
3. A denominational agency sells religious books to the general public, and generates substantial earnings. So long as it applies all net earnings to its religious mission, the earnings will not be subject to the unrelated business income tax.
   True or False
   
   
4. A denomination publishes a monthly journal for its pastors, and educational literature for affiliated churches that promote the denomination's religious tenets. The denomination generates substantial net income from the sale of these publications. The net income is subject to the unrelated business income tax because it is a substantial source of revenue.
   True or False
   
   
5. Same facts as question #4, except that the denomination also publishes general interest religious books that it sells to the general public. The sale of these books makes all of the denomination's publication income subject to the unrelated business income tax.
   True or False
   
   
6. Denominational agencies that engage in an unrelated trade or business will not jeopardize their tax-exempt status so long as they pay the unrelated business income tax on any net earnings from such a business.
   True or False
   
   

Many denominational agencies publish books and literature for affiliated churches. Some expand their audience to include other churches and the general public. Are the net earnings from such activities subject to the federal tax on "unrelated business income"? This question is addressed in this week's lesson.

A tax-exempt organization such as a denominational agency is not taxed on its income from any activity that is substantially related to the religious, charitable, educational, or other purposes that are the basis for its exemption. Such income is exempt even if the activity is a trade or business. However, if an exempt organization regularly carries on a trade or business that is not substantially related to its exempt purpose, except that it provides funds to carry out that purpose, the organization is subject to tax on its income from that unrelated trade or business. The tax is known as the "unrelated business income tax," and it generally reflects the same rates of taxation as the corporate income tax. The idea is this: if a charity realized income from an activity that is unrelated to its exempt purposes, it should have to pay taxes on that income. The term trade or business generally includes any activity carried on for the production of income from selling goods or performing services.

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