More and more often these days we hear people complain about churches not paying taxes. I find in the vast majority of cases that the people complaining have a muddled idea of what taxes they think churches should pay and usually no idea of what taxes churches do pay. I would like to clear up some of the confusion regarding what churches pay in taxes in the areas of property taxes, income taxes, and sales taxes.
First, in the area of real property taxes, most states limit the number of properties that any organization can exempt from taxes. I believe the number in Washington is five properties. If the church owns more than five properties the excess properties are taxed at regular rates. For example, the church I attended had one “property” of about 2 ½ acres but it was listed as five different tax lots in the county records. Any additional property acquired by the church would be fully taxable. In addition, many of the special fees and assessments made by the county on the property tax statement are not exempt, so the church paid a significant amount of property tax.
When it comes to income tax, I find that peoples’ thinking is particularly fuzzy. Our income tax system taxes entities on their net income after expenses. Very few churches have any net income after expenses if you count their ministry work as an expense. I never hear people declaring that the Red Cross, for example, should pay income tax on all its donations before deducting the expense of helping in emergencies. Perhaps some think that some churches run commercial businesses and don’t have to pay taxes on that profit, but they are incorrect. All federally tax exempt entities have to pay regular income tax on business profits that are unrelated to their tax exempt purpose. In addition, most tax exempt entities have to pay income tax on their investment income beyond a minimal amount. It may be that in the income tax area people are really talking about their belief that individuals should not receive a tax deduction on their personal tax returns for making a contribution to churches on the grounds that churches are not in the same category as other charities. That is a philosophical argument that is too deep for this format, but if that is what they are thinking they should make it clear so that a reasonable discussion can ensue.
In the area of state sales tax, churches have to pay sales tax just like any other consumer. Churches also pay excise tax on telephone service, license fees, and all the other miscellaneous taxes that the rest of us pay.
So whether you believe churches should pay taxes or not, let’s be sure that we know the facts before voicing our opinion.
Loren L McCann, CPA, MS (Tax)