The Church and Taxes

September 29, 2011 | 25 comments
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form-990The Church cares about taxes.[fn1]

It doesn’t really seem to care about the details of tax policy, of course. I’ve never seen the Church weigh in on the appropriate tax rate, tax base, or even the appropriate type(s) of tax (e.g., an income or consumption tax, a retail sales tax or a VAT, or whatever) a government should impose.[fn2] But still, it makes explicit and implicit nods that indicate that, ultimately, it cares both about its tax position and that of its members.

The Church and (Its) Taxes

Like (essentially) every other church in the U.S., the LDS church is exempt from taxation. Not only that, certain U.S. taxpayers who donate to the Church[fn3] can deduct their donations. And the Church is careful to protect its tax exemption. It explicitly does not endorse or oppose candidates for office.[fn4] Church property cannot be used for doing things that would endanger the Church’s tax exemption. It organizes its for-profit businesses as separate, non-exempt corporations.[fn5]

So the Church wants to maintain its exemption. Note, though, that the exemption benefits not only the Church, which doesn’t have to pay taxes, but its (U.S., but see below) members, who might get a deduction for their donations. Note, too, that even if the Church lost its exemption, it probably wouldn’t be taxable on donations it received; they would likely (though not unquestionably) be treated as non-taxable gifts.

The Church and (Members’) Taxes

(Note, here, that I don’t actually have any insider knowledge about Church decision-making; at best, I’m making mildly-educated inferences from public facts).

The Church expects its members to pay their taxes. [fn6] Nonpayment could make members ineligible for certain callings and temple recommends, and criminal conviction could, presumably, result in Church discipline.

That said, the Church also wants members to get deductions to which they’re entitled. For example, the Church filed an amicus brief in Davis, defending members’ deduction of missionary expenses they sent to their children on missions.

Moreover, the Church opposed a Utah flat tax proposal that would have eliminated deductions for charitable giving. There may be some self-interest in this, although I don’t imagine that losing a state tax deduction would prevent many tithe-paying members from paying their tithing.[fn7]

My last example: at the beginning of this year, the Church switched from allowing couples to jointly pay their tithing to a system where each payment of tithing has to be in the name of an individual member. Yes, this is a technological change—apparently, the Church changed or updated or something its accounting software—but it also has tax consequences. In the U.S., married people can file taxes jointly. Essentially, this allows them to aggregate their income and be taxed as if they were a single taxpayer. As such, for tax purposes, married U.S. taxpayers who file jointly should be indifferent as to which spouse pays the tithing; provided they can itemize, all of the tithing produces a deduction that they use jointly.

But countries are trending away from joint filing. Although in 1970, only 6 OECD countries taxed spouses separately, currently, only 13 of what I count as the 34 OECD countries (including the U.S.) allow for joint filing. In those individual taxation jurisdictions, in order to get a deduction (assuming, of course, a deduction is permissible, which it seems to be in at least some of the countries), a married couple has to determine which spouse is making the contribution, and it’s undoubtedly helpful to get a receipt in the individual’s name, not the couple’s.

[fn1] Note that, in asserting that the Church cares about taxes, I’m not saying that taxes occupy a central role for the institutional church, nor am I arguing that it doesn’t care about other non-Atonement-related things that aren’t taxes. For example, it seems pretty clear the the Church cares about immigration, MX missiles, and being good neighbors, among a whole ton of other things.

[fn2] And no, the book of Mosiah doesn’t address appropriate tax rates.

[fn3] Specifically, those members who itemize. And itemization is a threshold that the government, not the Church, imposes.

[fn4] Such an endorsement would theoretically cost the Church its exemption.

[fn5] Technically, of course, the Wikipedia article is wrong. There is no “unrelated business income” (notwithstanding the header to Section 511); it’s “unrelated business taxable income (emphasis mine). Moreover, although it would be UBTI in the hands of the Church, a non-exempt entity cannot earn UBTI; rather, the income is taxable to the corporations, which can pay an after-tax dividend to the Church. The Church, in turn, won’t be taxable on the receipt of the dividend, per its exemption.

[fn6] Income taxes, at least, but the reasoning behind our obligation to pay income taxes would apply equally to any other tax; I suspect that the Handbook wasn’t written by tax experts, so the language isn’t meant to exclude our obligations with respect to other taxes.

[fn7] I do think that tax expenditures affect people’s behavior, but they’re far from the only incentive people have. Moreover, Utah has a 5% income tax; that doesn’t make for a lot of savings. (Specifically, if you make a $100 donation, it will save you $5 in taxes.)

25 Responses to The Church and Taxes

  1. Jax on September 29, 2011 at 5:07 pm

    Sam,

    As you point out, the church would lose its tax exemption “theoretically” for making political statements (ie, endorsing a candidate). As I understand it this has NEVER been challenged in court because the IRS backs down and just tells the church to stop. Is this accurate? Can you elaborate?

    Also, is it true that churches are the ONLY subset of 501c’s that are restricted from taking political statements? It seems like every other type of non-profit group is able to be politically active, why can’t churches?

    Related, do you know much about the growing group of pastors who have been holding “Free Speech Sundays” and have been making political speeches about issues, candidates, etc – and then recording them to send to the IRS. It’s been happening for a few years, with the number of participating pastors (mostly evangelical I think) steadily increasing. They have had no lawsuits, fines, revocation of 501c3 status, from the IRS. I’m sure the church wouldn’t risk its tax status like that, but what changes could you see if this group or some other were to get the IRS to back off of its threats to pull charity status from churches if they endorse candidates?

  2. Sam Brunson on September 29, 2011 at 5:50 pm

    Jax, good questions, and I apologize for my brevity in answering them (I’m in the middle of making dinner).

    (1) There’s at least one case (that I don’t have in front of me right now) where the court upheld the IRS’s revocation of a church’s exemption. There may have been more revoked, where the church didn’t appeal, but, like you said, it’s uncommon.

    (2) All 501(c)(3 )s are prohibited from campaigning for or against candidates. All of them (including churches) are permitted to engage in some political activity, though, as long as it’s issue-oriented, and not person-oriented.

    (3) As far as I know, there have been no repercussions from Pulpit Freedom Sundays; my theory (in the article I liked to on the “theoretically”) is that the penalty is so bad that, although the IRS is required to impose it, it generally doesn’t. I advocate an intermediate penalty instead.

    Relatedly, the IRS is required to revoke these exemptions (notwithstanding the fact that it often doesn’t)—that’s what the Internal Revenue Code says. The Pulpit Freedom pastors, to the extent they want change, should be talking to Congress, not the IRS, because Congress writes the tax laws.

  3. Eric James Stone on September 29, 2011 at 5:51 pm

    > Also, is it true that churches are the ONLY subset of 501c’s that are
    > restricted from taking political statements?

    Not true. I worked for a non-profit group in DC that had two arms: a 501(c)(3) and a 501(c)(4). Donations to the former were tax-deductible, while donations to the latter were not. The former could not endorse candidates, while the latter could.

    I don’t believe there are any organizations that can both take tax-deductible contributions and advocate for or against specific candidates for office.

  4. Jax on September 29, 2011 at 6:17 pm

    Thanks for the info and the correction (Free Speech Sunday to Pulpit Freedom Sunday).

    I’m curious Sam why you say the IRS is ‘required’ to revoke the 501c3 status, but doesn’t. Doesn’t that go contrary to the definition of ‘required’?

  5. Dan on September 29, 2011 at 6:20 pm

    self-interest. the best words of this piece. The church will back whatever ensures its survival.

  6. Sam Brunson on September 29, 2011 at 6:31 pm

    Jax, definitionally, a 501(c)(3) entity is one that doesn’t support candidates. Ergo, if it does, its exemption must be revoked, and the responsibility to do so is delegated to the IRS.

    Dan, I’m not convinced that follows anything I’ve said. I suspect that the Church could continue to exist—probably even thrive—if it weren’t exempt from taxes. In fact, I suspect it has no exemption in some countries. Moreover, dealing with individual donors, rather than couples, emphasizing the paying of taxes as a duty of members, and filing an amicus brief have nothing to do with its survival.

  7. Dan on September 29, 2011 at 8:45 pm

    Sam,

    As you say, the church could exist and even possibly thrive without its tax exemption, so why does it push to protect its tax exemption? Even when it limits what influence it can have in America?

  8. Sam Brunson on September 29, 2011 at 9:12 pm

    Dan, it’s not pushing to protect its tax exemption. It is providing policies that members need to follow in order for the Church to remain tax-exempt. Especially given that the Church is staffed largely by laypersons, and that even those professionals we have aren’t necessarily knowledgeable about the tax law, it makes a whole lot of sense to lay out policies (such as, The Church remains politically neutral and Don’t do commercial things in Church buildings that could cause the Church to lose its exemption).

    In addition, it acts in such a way as to comply with the tax limitations. I can’t think of any reason that it shouldn’t comply, given that the benefit of tax exemption is available.

    What the Church has pushed to do is protect the deductibility of members’ donations, which is an entirely different thing and one, in general, that I suspect benefits members more than it benefits the Church. However, the savings are pretty minimal: in Utah, it’s five cents on the dollar of donation (technically, less than that, since state taxes are deductible on your federal return, so by lowering your state taxes, you’re increasing your federal taxes). And note that the amicus brief failed; the Church ended up changing the method it used for financing missions (again, probably both for tax and non-tax reasons: I suspect the timing of the change was tax-related, but the change was inevitable, however the Supreme Court decided Davis).

  9. Chadwick on September 30, 2011 at 2:42 am

    I find it interesting the church now can provide donation statements by person rather than by family. My wife is now a mostly full-time SAHM, working about 10 hours a week. But before we had kids, and when we lived in Costa Mesa, CA, she worked full time. For some reason it really irked her that somehow I got all the credit for our donations. She even asked the Bishop about it and he said the system was such that it was tracked by family. She’ll be happy to note the change when I tell her.

  10. Geoff - A on September 30, 2011 at 2:56 am

    As I understand the situation in Australia the church is tax exempt. Until a few years ago tithing was not claimable against tax by memebers but an arrangement was made with the church and that became available.

    I understand the church has to spend a proportion of it’s income in Aus for that to be available. Someone choose to move the Pacific area offices to NZ and they no longer spent the required proportion. Members contributions are now 75% deductable rather than 100%.

    I may have some of these details wrong as I am no longer a tax payer.

  11. Paul on September 30, 2011 at 7:20 am

    #9 Chadwick — the church has LONG had the possibility of reporting donations separately; only recently has reporting them jointly become difficult.

  12. Kent Larsen on September 30, 2011 at 8:30 am

    Fascinating post, Sam. I think this is very valuable — an explanation that hasn’t really be available as far as I know. There are elements of this that I didn’t know, despite my accounting training.

    I’m particularly fascinated by the International tax aspects of this. Mormon culture and even Church policy many times seems oriented to U.S. issues. Its fascinating to see the International aspects explained and get the hint that perhaps the Church has changed procedure because of International tax issues.

  13. Sam Brunson on September 30, 2011 at 8:57 am

    Thanks, Kent.

    Paul, that’s interesting. I’m curious how well-known the ability to report donations was, especially outside of the U.S. where it would have tax relevance. My impression (though I didn’t use MLS much before the switch) was that most people assumed you had to give a joint statement, not an individual one. So, at very least, by not permitting joint statements, the Church forces wards to give receipts that can work for either system of taxation.

    Geoff – A, thanks for the international perspective. What little I know about Australia’s tax/finance system has been really interesting, and now I know about twice as much as I did before!

    And Chadwick, always glad to make someone happy.

  14. Paul on September 30, 2011 at 9:21 am

    I was a financial clerk pre MLS days when we could receipt any way we wanted.

    With the advent of the computerized systems, we could receipt individuals or name them however we wanted. The latest version (I think — I’m no longer in the clerking game) requires tying receipts to member numbers, though even now my ward’s clerk can combine my wife’s and my records for a joint statement if we ask him to(he did last year, anyway).

    My own observation last time I trained on MLS (while in a bishopric) is that MLS is not entirely intuitive, and it’s not always simple for the clerk to know the capabilities of the system unless someone asks a question.

  15. Sam Brunson on September 30, 2011 at 9:53 am

    Paul, thanks again for the info. As I understand it, clerks can no longer combine records—the new system was implemented as of Jan. 1 of this year, IIRC. It’ll be interesting to see this year if clerks can still combine records for a joint statement.

  16. chris on September 30, 2011 at 11:32 am

    I’d rather have the home interest deduction go, than the charitable deduction.

    In some senses, I think it’s good to just say, “here are the rules, no exceptions/deductions”. Especially considering how convoluted our tax code is.

    But if there is any one thing our tax policy should encourage (and not discourage) it should be charitable giving. If you give that money to some organization to help people, it’s not income you are receiving for personal gain that should be taxed.

    However, paying interest on your mortgage, is definitely a benefit you receive you should be taxed for. You are paying for the privilege of living in a house now that you couldn’t otherwise afford. I don’t see any reason why that’s not a benefit you should pay for and be taxed for, if indeed we are going to tax people’s income.

    But giving away your income and receiving only abstract, non-tangible benefits via charity is not the kind of gain we want to tax away.

  17. KTB on September 30, 2011 at 12:17 pm

    One interesting situation regarding taxes in other countries is the series of legal cases in the U.K. regarding whether the London and Preston Temples are tax exempt (chapels are clearly exempt). The fact that the Church appealed all the way to the House of Lords (since replaced by the Supreme Court of the U.K.) in both cases indicates to me that the Church cared very much about the exemption.

  18. Sheldon Miller on September 30, 2011 at 4:25 pm

    The Church’s concern with tax issues is compounded by the fact that it is a unitary tax entity in the US. Most churches are congregational and so have a much lower tax profile. Even the Roman Catholics have only a diocese level tax entity. Back in the days of ward budgets our congregation always felt constrained in the ways we could raise money because we were part of a bigger whole. The other churches in town didn’t seem to feel constrained by tax issues.

  19. Kent Larsen on September 30, 2011 at 6:54 pm

    KTB (17), I’d heard a little about this, but I’d sure like to know more. What was the reasoning why the UK government claim that the Temples are not tax exempt? IIRC it had something to do with the fact that Temples are not open to the public (i.e., you have to have a recommend to enter)? Is that correct? IIRC the tax exemption idea there isn’t that you are necessarily a religion, but that you are serving the public. Is that right?

  20. Alison Moore Smith on October 1, 2011 at 11:49 am

    chris #16:

    …paying interest on your mortgage, is definitely a benefit you receive you should be taxed for. You are paying for the privilege of living in a house now that you couldn’t otherwise afford. I don’t see any reason why that’s not a benefit you should pay for and be taxed for, if indeed we are going to tax people’s income.

    Paying interest is a benefit that you should be taxed for?

    chris, interest is the cost of using money you didn’t earn. As soon as you do earn the money — to pay back the loan, plus interest — you are taxed on the money. You really want people — who can’t afford to buy a home with cash — to be taxed on money they haven’t earned yet?

  21. Sam Brunson on October 1, 2011 at 2:04 pm

    Alison,
    You’re conflating two things: the mortgage and the mortgage interest. (How we got here on a thread about the Church and taxes I do not know, of course.) Chris doesn’t seem to suggest that we be taxed on the mortgage loan we receive; that’s right under the current income tax system (though query whether we’d come to a different conclusion if we had a consumption tax); he does, however, say that he thinks we should eliminate the mortgage interest deduction before we touch the charitable deduction. And eliminating the mortgage interest deduction is clearly within the mainstream of contemporary economic thought. It’s the only personal interest that’s deductible (e.g., you can’t deduct the interest on your car loan, your credit card debt, or any other debt you incur for non-business purposes). And the interest, as opposed to principal you receive upfront, clearly comes out of current, rather than future, earnings.

    Of course, like I said, I can’t really connect this to the Church and taxes because, AFAIK, the Church has never discussed the mortgage interest deduction. (Maybe, if we really stretch, we can get there from the current stay-where-you-are counsel?)

  22. Alison Moore Smith on October 1, 2011 at 5:49 pm

    You’re conflating two things: the mortgage and the mortgage interest.

    Sam, I’m not following. I’m not sure how I conflated mortgage and mortgage interest. (I do know the difference. I’m an accountant.) I was merely responding to chris’s statement. He said, “…paying interest on your mortgage, is definitely a benefit you receive you should be taxed for.”

    Is there some other way to read this than that he thinks paying interest is a benefit that should be taxed?

    Chris doesn’t seem to suggest that we be taxed on the mortgage loan we receive…

    I agree. Rather, he said that we should be taxed on the “benefit” of paying interest.

    And eliminating the mortgage interest deduction is clearly within the mainstream of contemporary economic thought. It’s the only personal interest that’s deductible (e.g., you can’t deduct the interest on your car loan, your credit card debt, or any other debt you incur for non-business purposes).

    Thus some of the benefit of making everything a business deduction, eh? I’m old enough to remember when all personal interest was deductible. (And, yes, I walked to school up hills both ways then, too.) So is he saying that being able to DEDUCT interest payments (as opposed to paying them, as he said) is a “benefit” that should be taxed?

    If so, that would be super fun. As if the tax system isn’t convoluted and idiotic enough. Let’s give deductions and then tax people for taking them. What’s the associate math with that? If not, I don’t understand the point.

    And the interest, as opposed to principal you receive upfront, clearly comes out of current, rather than future, earnings.

    Not following again. Sure, ongoing interest payments come out of current earnings. (Does that mean something in this context?) But “principle you receive up front” doesn’t “come out” of current or future earnings. It “goes in.” But not sure the point you’re trying to make. Interest payments come out of current earnings and so they are a “benefit” that should be taxed?

  23. Alison Moore Smith on October 1, 2011 at 9:23 pm

    After pondering this in a hot shower, I think chris did not mean that paying interest is a taxable benefit (“paying interest on your mortgage, is definitely a benefit you receive you should be taxed for”), but that paying mortgage interest is a payment for something that is for your own benefit. As opposed to charitable payments, which are for someone else.

    So if only one is to get a deduction, it should be the payment for someone else.

    Did I get it? :)

  24. Kent Larsen on October 1, 2011 at 9:48 pm

    I think you got it, Alison. That was my take. Some of how Chris worded this was a little confusing.

  25. Sam Brunson on October 1, 2011 at 10:49 pm

    Alison, that’s my understanding of what Chris meant, although, like Kent said, it wasn’t crystal clear. (But how much is in blog comments.)

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