Q:  My church rents the space in which we hold our Sunday morning services. Our landlord is another nonprofit. That organization provides after-school programs to public school students.

Besides being a parishioner, I am the owner of a music recording studio. I would like to propose a partnership between my studio, the church, and the nonprofit. I would offer the students and program personnel from the nonprofit full access to the studio and equipment, in exchange for full use of the space in the building that the church has been renting. While the church would no longer have to pay the nonprofit rent, I would like to be paid by the church for the use of the studio and equipment. Is there any way to do this without the nonprofit losing its exempt status? Are there other ramifications to this concept that we should be aware of? Are there better ways to form such a relationship?

 

A: This is certainly an interesting proposal. But, I’m not sure that it is the approach to pursue. Let’s start with some basics. I see where such an arrangement benefits you. You get someone to cover your costs and, while you lose some time in the studio, and you may see more wear and tear on your equipment, you still retain your full ownership. But, I’m not sure the arrangement benefits either of the other two parties.

Granted, the space the church is renting from the after-school program wasn’t previously being used. And, young people typically love music. Being able to present the students with a professional in-studio experience at no out-of-pocket cost may give the nonprofit a leg up on other after-school programs. But, will it willingly give up the extra income it has gotten used to receiving from the church? Is it even interested in offering a program of this sort? Does it have the bandwidth and the appropriate staff to offer it?

And, what about the benefit to the church? While it may no longer have to pay rent to the nonprofit, it would have to pay it to you under the scenario you present above. Unless you are offering to charge the church significantly less money than the church is currently paying the nonprofit to rent its space for services, the proposal probably makes no sense.

There are far more critical issues, however. The assets of any nonprofit, including a church, must, by law, be used to further the mission of the organization, as outlined in its Articles of Incorporation. If the church has an active youth program that is somehow enhanced by offering music to the youth in the after-school program – say the youth in the church participate in the music program with the youth in the after-school program – you might get away with this. However, paying an independent business owner to provide his services to another organization – albeit another nonprofit organization –could put the church in the IRS’s cross-hairs.

Further, as you’ve designed the proposal, the church would be paying donated funds to a for-profit business for services it is not actually receiving. Even though you can argue that it is getting an equivalent, or better, deal in return, some people may resent this. It could eventually affect the church’s donations and/or membership.

Your place in the church also matters. Are you merely a parishioner, or do you have some other role with the church? For instance, are you on the board? If so, you must check what your bylaws and/or policies state regarding conflict of interest. Typically, if you are on the board, it’s frowned upon for you to personally benefit from an arrangement like this, unless you can demonstrate – and the other board directors agree – that you are proposing an extraordinary offer. If you can’t justify the deal, or if everyone ignores the church’s conflict of interest policy, you, along with the rest of the board directors, the church’s executive director, and the church itself could be fined at a rate greater than the amount deemed to be excess benefit.

A couple of thoughts… One is to donate the use of your studio and equipment to the nonprofit, if the nonprofit forgoes rent from the church. You could probably take a tax deduction and you would be doing a “mitzvah” (a good deed). Another, safer route, is to leave the church out of it altogether. Let the church continue to pay rent, and you negotiate independently with the leadership of the after-school program for it to rent your studio for the youth in their program. Renting equipment and services that are directly related to furthering one’s mission is perfectly legit. Of course, both these ideas are dependent on the after-school program being interested in offering such a music program to its youth.

As I often do with complex questions such as yours, I want to remind you and my other readers that I am neither an attorney, nor a CPA. I strongly suggest you run this question by those professionals, particularly those who specialize in the nonprofit sector. You might also call IRS Tax Exempt and Government Entities Customer Account Services at (877) 829-5500. Their answers may be different once they hear all the details!

 

Have questions about other issues that impact our sector? Let CoreStrategies help you answer them for your organization. To learn more, contact Terrie Temkin at 888-458-4351 Ext. 83 or TerrieTemkin@CoreStrategies4Nonprofits.com.

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Terrie Temkin, Ph.D. is an internationally-recognized governance and planning expert, as well as the editor of You and Your Nonprofit Board: Advice and Tips from the Field’s Top Practitioners, Researchers and Provocateurs. She is a founding principal of CoreStrategies for Nonprofits, Inc., which interweaves business development, governance, board development, fund development, PR/marketing and public policy to strengthen organizational capacity. She invites your questions and comments. Contact her at 888-458-4351 Ext. 83 or TerrieTemkin@CoreStrategies4Nonprofits.com. Meanwhile, check out the CoreStrategies’ website for back issues of “On Nonprofits” and other articles at www.CoreStrategies4Nonprofits.com.