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IRS Rules Church *Coffee Shop * Not Tax-Exempt

I love talking with pastors. I get to hear about how their churches are impacting their community and about their visions and dreams for the future.

Of the thousands of conversations that I have had with pastors throughout the years, I have noticed that there seems to be a common denominator amongst pastors and it is that pastors tend to have an entrepreneurial spirit.

This is a good thing because many pastors are using their entrepreneurial spirit to create new and different ideas to reach more people and grow God’s kingdom. But from a compliance aspect, what are the limitations and parameters in which the entrepreneurial spirit of a pastor can operate?

The IRS recently ruled that a church coffee shop established for evangelistic purposes did not qualify for tax-exempt status since its activities could not be distinguished from that of a for-profit coffee shop.

Does this mean that the church coffee shop can no longer operate? Is there a way for the coffee shop to still operate while promoting the Gospel and benefiting the church at the same time?

I’m going to address these questions, but before I do it is important for you to know a little bit more about the church coffee shop and why the IRS denied the coffee shop’s tax-exempt status.

Why did the IRS deny the approval of the coffee shop’s tax-exempt status

I want to quickly note that it is important to make the distinction that the IRS did not deny the approval of a church’s tax-exempt status, but rather the approval of a coffee shop’s tax-exempt status.

Now, so as not to bore you with all of the nitty gritty details, I will list out in bullet points the purposes of which the coffee shop was formed and some of the activities it described in its application for tax exemption. (If you wish to read the ruling in full you can find it in IRS Private Letter Ruling 201645017.)

The church coffee shop was formed for the following four purposes:

  1. Proclaiming earnestly the gospel message and to urge its personal acceptance.

  2. Promoting prayer, Bible study, missions, Christian fellowship, evangelism, Christian service, and encouraging, in every possible way, a lifetime commitment to Christ.

  3. Providing a forum in which the Gospel of Jesus Christ can be discussed with non-believers outside of a formal church setting.

  4. Generously extending the grace of God by giving away 100% of all profits (except those retained for capital expenditures) to community ministries, other local, national or international non-profits or organizations, or those in financial need.

In its application for 501(c)(3) approval, the coffee shop described its purposes and activities, and some of the activities listed are as follows:

  • The coffee shop was opened Monday through Friday 6 a.m. to 8 p.m. and Saturday from 7 a.m. to 8 p.m.

  • Its primary source of revenue was from coffee shop sales.

  • The coffee shop’s expenses were mainly for salaries, cost of goods sold, and occupancy expenses to support the operation of the coffee shop.

The IRS acknowledged that “[w]hile donating funds to other non-profit community organizations is charitable . . . [the coffee shop’s] main focus is the operation of a coffee shop.

The IRS concluded its review of the coffee shop’s application for tax exemption stating, “You are not described in Section 501(c)(3) of the Code . . . because you fail the operational test. Specifically, the facts show you are not operated exclusively for Section 501(c)(3) purposes because a substantial portion of your activities consists of the operation of a coffee shop in a commercial manner.”

So, back to the question I asked at the beginning of this blog:

  • Does this mean the church coffee shop can no longer operate?

  • Is there a way for the coffee shop to still operate while promoting the Gospel and benefiting the church at the same time?

In short, there is a way for the church to still operate the coffee shop with its purpose of sharing the Gospel and it benefiting the church.

“How,” you ask? - Through a strategy known as a for-profit arm.

(Recommended reading: "Is Your Next Mission Field the Marketplace?")

What is a for-profit arm?

A for-profit arm has a twofold benefit:

  1. The first benefit of a for-profit arm is that it allows a church to enter the marketplace. Our society can use more Christian-owned businesses that implement good business practices such as fair trade and that provide good paying jobs to those in the community.

  2. The second benefit of a for-profit arm is that it generates income for the church.Let me explain.

In essence, a for-profit arm is a ministry-owned business that is established to make tax-free money paid as donations and dividends.

The for-profit arm exists as a regular for-profit business that is described in Internal Revenue Code section 502. This business can engage in any lawful activity and be open to the general public.

The type of business can be anything you want it to be - like a coffee shop for instance - so long as it is a lawful business and your ministry feels good about it.

#ChurchManagement #IRS #501c3

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