Church leaders are wise to review the rules and monitor developments, especially heading into the 2026 midterm elections.
2. Providing Private Inurement or Private Benefits
A church must operate exclusively for exempt religious purposes. That means its income and assets cannot improperly financially benefit private individuals.
Two issues matter here: private inurement and private benefit.
Private inurement occurs when insiders—such as pastors, board members, or key employees—receive an economic benefit that far exceeds what they provide in return (also known as an excess benefit transaction). Examples include:
- Excessive salary or housing benefits, unapproved bonuses, or deferred compensation arrangements
- Below-market loans
- Personal use of church property without proper reporting
- Transfers of property to insiders for below-market value
- Nonaccountable expense reimbursements
Private inurement subjects insiders to excise taxes of up to 225% of the benefit received.
Those who approved the benefit (such as church board members) also face a tax of up to 10 percent (capped at $20,000).
Certain types of transactions can automatically trigger these penalties, too (even if the amounts involved are relatively insignificant). One example is a church’s payment or reimbursement of a pastor’s personal or business expenses under a nonaccountable arrangement. Another example is the failure to report any fringe benefit an insider receives.
Additionally, the church itself faces the loss of its tax-exempt status for any private inurement and excess benefit transactions that occur on its watch.
Private benefit prohibitions are based on similar principles, but work differently.
A private benefit is one that benefits an individual or business, regardless of whether the persons who benefit are insiders or not. It involves benefiting these individuals or businesses in a way that is more than incidental to the church’s exempt purpose.
The primary risk is the church’s loss of its tax-exempt status.
To avoid problems with private inurement or private benefit, leaders should:
- Ensure all transactions with insiders are reasonable and properly documented.
- Avoid allowing personal use of church funds or assets.
- Structure activities clearly for public—not private—benefit.
3. Failing To Comply With Rules Involving Alternative Revenue
Aside from tithes and offerings, churches may generate income from a variety of activities. They may sell books, operate cafés, rent facilities, host conferences, or run seasonal fundraisers.
Alternative revenue alone does not necessarily result in taxes or threaten exemption.
But the manner in which the activities are conducted, along with other facts and circumstances, may trigger unrelated business income tax (UBIT) that the church must pay, and expansive ongoing activities also may call the church’s tax-exempt status into question.
Warning signs include:
- A commercial venture that dominates staff time and resources
- A business activity competing directly with for-profit enterprises
- Little connection between the activity and the church’s ministry
Occasional fundraising events are generally safe. But sustained, commercial-like operations require careful analysis.
Church leaders should regularly evaluate whether revenue-generating activities advance—or distract from—their churches’ exempt religious purposes.
