The government acknowledges the valuable social and religious contributions of church organizations to the community. In order to support these 501c3 religious organizations and enable their existence, the Internal Revenue Service (IRS) grants tax exemption to 501(c)(3) churches, meaning they are not required to pay federal taxes.
However, this tax-exempt status and special nonprofit protection raise questions about the definition of a church or 501c3 501c3 religious organization. Specifically, what does the American government consider as a 501(c)(3)-qualified church? Are there certain types of worship or ministries that do not qualify as churches?
In the following discussion, we will delve into everything you need to know about 501(c)(3) churches. This includes the criteria for qualification, the advantages and disadvantages of 501(c)(3) status, as well as the requirements and regulations for maintaining tax exemption as a 501c3 religious organization.
What is a 501(c)(3) Church?
A 501(c)(3) church refers to any 501c3 religious organization that has obtained tax-exempt status from the IRS. These organizations typically encompass places of worship, such as chapels and synagogues, that conduct regular religious services. Unlike some other nonprofit organizations, churches are not required to apply for tax exemption. If a church meets the requirements outlined in the Internal Revenue Code (IRC), it automatically receives this filing status.¹
According to the IRS, "Churches (including integrated auxiliaries and conventions or associations of churches) that meet the requirements of section 501(c)(3) of the Internal Revenue Code are automatically considered tax exempt and are not required to apply for and obtain recognition of exempt status from the IRS."
This privilege allows donors to claim tax deductions for any donations made to a church, even if the organization has not sought or received official IRS recognition as a tax-exempt nonprofit.
Requirements for Obtaining 501(c)(3) Status for Your Church
The IRS grants automatic tax-exempt status to churches if they fulfill the requirements stated in section 501(c)(3) of the IRC. This means that there is no formal application process for church tax exemption. However, if you wish to become a 501(c)(3) church, you still need to adhere to the procedures outlined by the IRS.
Additionally, you must comply with the eligibility rules set forth by the IRS in order to qualify and maintain your status as a tax-exempt organization.²
Here is a detailed explanation of these requirements:²
Organization for exempt purposes: The church must have an exempt purpose, which includes charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or preventing cruelty to children or animals.
No private shareholder benefit: The church cannot utilize its earnings for personal interests or distribute net earnings to benefit any individual or private shareholder.
Minimal involvement in legislation: While a 501(c)(3) organization can engage in lobbying for legislation, it cannot endorse specific political candidates.
Is 501(c)(3) Status Necessary for Your Church?
Although your church automatically qualifies for tax exemption as a nonprofit, you may choose to pursue 501(c)(3) status for other tax-related purposes or to enhance credibility with your congregation or donors. There are advantages and disadvantages to obtaining 501(c)(3) status.
However, 501(c)(3) status may not be suitable for everyone. For instance, you may desire more political influence for your charitable organization or wish to generate more profits for yourself or shareholders. While these goals are not inherently negative, they do not align with the requirements and behavior expected of a 501(c)(3) organization.
In the subsequent sections, we will collectively examine the pros and cons so that you can determine if 501(c)(3) status is appropriate for your church.
Advantages and Disadvantages of Becoming a 501(c)(3) Church
Pros:
Tax-exempt status: Your nonprofit organization will be exempt from federal income tax and property taxes.
Deductible donor donations: Your donors can claim tax deductions for their contributions to your church.
Financial transparency: Your tax returns are public, which enhances transparency and trust in your charitable organization. It also allows you to demonstrate your charitable missions and philanthropic efforts without appearing boastful or self-centered.
Grant opportunities: You can apply for and receive government and nongovernment grants limited to 501(c)(3) charitable organizations.
Cons:
Limited political influence: You will be unable to support political candidates, endorse political campaigns, or dedicate significant time or resources to lobbying for the legislature.
No private shareholder benefit: If you desire greater financial gain for yourself or those closely associated with your cause, 501(c)(3) status will restrict that potential.
Financial disclosure: While you may not wish to disclose every expense, revealing all your financial information can improve transparency.
How to Obtain 501(c)(3) Status for Your Church
Here is a brief step-by-step process for applying for 501(c)(3) tax-exempt status:
Obtain an Employer Identification Number (EIN): Request an EIN from the IRS by submitting Form SS-4. Even if you do not have employees yet, you will still need an EIN.
File Form 1023: Submit IRS Form 1023 along with the required filing fee to the IRS.
Await IRS approval: Wait for the IRS to review your application and send a determination letter notifying you of their decision.
Consider seeking legal counsel from a lawyer to assist you in submitting the necessary documentation for your 501c3 religious organization. They will be familiar with all the intricacies involved, helping you expedite the process and obtain your 501(c)(3) determination letter as quickly as possible.
Rules for Maintaining 501(c)(3) Church Status
While your church may automatically qualify for 501(c)(3) tax exemption, you must fulfill the associated standards to retain your exempt status.³
Engaging in certain activities can jeopardize your tax-exemption status, thereby rendering your donors' future contributions no longer eligible for tax deductions. This could significantly impact the interest and ability of potential donors to support your work.
Here are a few rules you must abide by to maintain your 501(c)(3) church status:
File your tax return on time: Submit an annual tax return (IRS Form 990). Failure to do so could result in the loss of your tax-exemption status.
Avoid excessive lobbying: Remember that 501(c)(3) religious organization can engage in lobbying for legislation, but they must not make it a substantial part of their activities or participate in any campaign activity for or against political candidates.
Manage finances responsibly: Do not jeopardize your 501(c)(3) nonprofit corporation status by mishandling finances or benefiting private shareholders or individuals.
Maintain the organization's purpose: Stay true to your church's religious objectives. Shifting to religious research or education would not cause you to lose your 501(c)(3) status, but you would no longer be technically classified as a "church." Consequently, you would need to submit a formal 501(c)(3) application (and obtain approval) to qualify for tax exemption.
Avoid illegal activities: Do not compromise your church's nonprofit status, as engaging in illegal actions would result in its revocation.
Establish bylaws: Although nonprofit bylaws are not a requirement for churches to attain 501(c)(3) status, they can assist you in governing your qualified organization, establishing rules for church leaders, and ensuring adherence to the appropriate processes to safeguard your nonprofit corporation.
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