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Churches and Nonprofits Must Pay a New Federal Tax—And Many Don’t Even Know

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The Story: A new change in the tax code may requires some churches, Christian schools, and other nonprofits to start paying federal income tax.

The Background: Late last year, Republicans in Congress passed their long-promised tax reform legislation, the Tax Cuts and Jobs Act. Included without much fanfare was a provision that created a new 21 percent tax on the value of some of nonprofit employees’ benefits.

According to the Evangelical Council for Financial Accountability (ECFA), tax practitioners who have evaluated Section 512(a)(7) believe as a result of this new provision, tax-exempt organizations that provide parking to their employees will be subject to unrelated business income tax on the cost of the parking provided. Even by simply allowing its employees to park in a parking lot or garage, that part of the organization’s facilities will be subject to a tax on the cost of the parking provided.

Because of this new change, many churches, charities, religious schools, and hospitals will be required to start filing federal Form 990-T, regardless of whether they actually engage in any unrelated business activity. In addition to filing federal income tax returns, some nonprofit employers will also be required to file state income tax returns and possibly pay a state income tax.

At least one Republican lawmaker is now proposing to rescind the tax, Politico reports, though House Ways and Means Chairman Kevin Brady—a key architect of the new tax law—is defending the provision, saying it will simplify the code when it comes to how workers are compensated.

Church and nonprofit leaders, though, say the new tax is merely going to cause problems with compliance.

“There’s going to be huge headaches,” said Galen Carey, vice president of government relations at the National Association of Evangelicals, an umbrella group of evangelical Christian organizations, told Politico. “The cost of compliance, especially for churches that have small staffs or maybe volunteer accountants and bookkeepers—we don’t need this kind of hassle.”

The ECFA is currently circulating a petition advocating for the repeal of this new provision either by legislation or by an administrative action of the Treasury Department.

Why It Matters: Jesus commands us to “render to Caesar the things that are Caesar’s” (Matt. 22:21). So has your church rendered unto Caesar the tax for your staff’s parking “benefit”?

Probably not, which means you have failed to meet the requirements of the new federal requirements. The new law went into effect on January 1, 2018, and nonprofits are supposed to pay it quarterly. That means nonprofits should have already paid half the annual tax.

But if you’re a pastor or nonprofit leader who doesn’t know how to comply—or wasn’t even aware of the law—you’re not alone. According to Politico, groups like the Boys & Girls Clubs of America, Goodwill Industries, the YMCA, and the National Council of Nonprofits are demanding the tax at least be delayed, since the Treasury Department hasn’t even provided the details of how the tax will work.

The purpose of the change was to provide parity between for-profit and nonprofit employers on taxing employees’ benefits. But as Politico notes, nonprofits don’t pay income taxes, so lawmakers couldn’t take away fringe-benefit deductions. Instead Republican lawmakers created a new 21 percent tax on the value of some of nonprofit employees’ benefits, such as free parking.

Whether or not it’s wise to tax all nonprofits, churches and other religious institutions should be excluded.

In America, religious organizations are almost always exempt from federal, state, and local taxes. The justification for this policy is usually that such institutions provide vital charitable benefits to society. While that is undoubtedly true, the benefits argument is not the strongest reason to support broad tax exemption. A better reason is that we need to maintain a distinction between the state and the church.

As Richard W. Garnett and Paul J. Schierl explain, the separation of church and state is not a reason to invalidate or abandon these tax exemptions but is instead a powerful justification for retaining them:

The point of church-state “separation” is not to create a religion-free public sphere. It is, instead, to safeguard the fundamental right to religious freedom by imposing limits on the regulatory—and, yes, the taxing—powers of governments. After all, as Daniel Webster famously argued in the Supreme Court (and the great Chief Justice John Marshall agreed) the power to tax involves the power to destroy, and so we have very good reasons for exercising that power with care—especially when it comes to religious institutions.

With all of the other concerns in the world, the parking tax may seem like a relatively trivial issue. But in complying with the law churches will need to take new measures—such as hiring tax specialists and filing federal tax returns—that will make it easier for the federal government to regulate houses of worship. By conceding to this intrusion now we’ll be welcoming more invasive interference by the federal government in the future.

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