So at ShareMySpace we talk a lot about how renting out unused spaces can be a great source of revenue for businesses and individuals. But there’s one category of space sharers with special considerations: the tax-exempt nonprofit. For a church or nonprofit, if renting out spaces becomes a significant form of income, it can potentially raise tax complications.
Does that mean sharing space is impossible? Definitely not! Here are just a few practicalities to consider:
1. “Rent” vs. “Donation”: If a church or other nonprofit organization is renting out some of its spaces, the goal isn’t the same as it would be for a commercial landlord. Such an organization isn’t looking for profit beyond what’s needed for maintenance of the facilities and the basic carrying out of its mission. So money paid by tenants isn’t “rent,” exactly — it’s a contribution. Rental agreements for nonprofit organizations should specify that the tenant will make a “contribution,” “donation,” or “stipend,” rather than paying rent as in a more traditional space sharing agreement.
2. Unity of purpose, outside the box. In most cases, a nonprofit will want to make its space available to tenants whose mission in some way complements its own. That doesn’t mean, however, that an old Sunday school building can only be rented to religion teachers! Think about how the person coming in to make use of the space might be contributing to the benefit of the community — teaching affordable classes, hosting a charity event, etc. — in a way that’s substantially related to the mission of the nonprofit that owns the space. This can extend to a wide range of activities whose purpose isn’t primarily profit — we’ve written before here about how a partnership between churches and artists, for example, is a much more natural one than most people would think!
3. “Taxes” isn’t always a dirty word. Lots of nonprofits have what’s called “unrelated business income,” which is taxable — income from renting parts of their real estate or from other activities not related to their main purpose. According to the IRS, “unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption.” The tax-exempt status of the organization as a whole is not necessarily jeopardized by the fact that it has a bit of taxable income here and there. The IRS offers a helpful tutorial on this topic here, and a good accountant can help work out any details that are still confusing.
It’s always a good idea to clarify these details in a clearly written space sharing agreement, in order to avoid possible conflicts and complications. We’ll be writing more in the coming weeks about the nuts and bolts of space-sharing agreements, and even providing some helpful templates you can use to streamline your space-sharing experience! Stay tuned.
Photo via Wikimedia Commons