501(c)(3) Tax-Exempt Status: Is It Right for Your Church?

What is a 501(c)(3) church, and what are some benefits and disadvantages of a church having a 501(c)(3) tax-exempt status? This is what you need to know. When starting a new church, one decision you will need to make early on is whether or not you will pursue a 501(c)(3) exempt status from the IRS. The American government has recognized that churches perform valuable social functions and, as a result, tax exemption is a long-held American tradition.

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According to the IRS, a church, or a body of believers, is exempt from taxation by the federal government. It is because of their special protected status that churches have the potential to influence their community and beyond in ways the government can’t.

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What Is 501(c)(3) Tax Exemption Status?

So what does it mean to be a 501(c)(3) church, and is the designation beneficial? In short, if an organization, including a church, receives 501(c)(3) exemption status from the IRS, it is a recognition that they are exempt from federal income and property taxes. In addition, people who make contributions to 501(c)(3) organizations may deduct the contribution amount from their taxable income.

According to the IRS, “Churches that meet the requirements of Internal Revenue Code section 501(c)(3) are automatically considered tax exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS.” So it isn’t required for your church to apply for 501(c)(3) in order to be tax-exempt.

Keep in mind, churches may lobby for legislation or ballot initiatives, but they are prohibited from showing support for political candidates. If a church is shown to be in violation of this restriction, they risk losing its exempt status. What most people don’t realize is that churches and nonprofits exist under this definition whether or not they have officially received 501(c)(3) status from the IRS.

Why Get the Status?

While becoming a 501(c)(3) church is not a necessity, it does have benefits.

1. The IRS recognition gives added assurance to church leaders, members, and contributors that the church is recognized as exempt and their contributions are generally tax-deductible.
2. 501(c)(3) status enhances an organization’s financial transparency. Maintaining your status requires that informational tax returns be filed on an annual basis and this information is available to the public on GuideStar. As a result, potential contributors are able to gain an essential understanding of the organization and determine whether or not he or she would like to give to them. If your church administers a lot of charitable missions and services, this transparency has the potential to be highly beneficial.

How to Apply for 501(c)(3) Tax-Exempt Status

To find out about applying for an IRS 501(c)(3) exemption status, the IRS provides a Tax Guide for Churches and Religious Organizations (PDF).

Generally speaking, there are three steps to gaining 501(c)(3) exemption status:

1. Obtain an Employer Identification Number (EIN)
   You can request an EIN from the IRS by filing Form SS-4 (PDF). (An organization will need an EIN whether or not they have employees.)
2. File the IRS Form 1023
   Submit Form 1023 and a filing fee (amount determined by the average yearly gross receipts).
3. Receive IRS approval
   Your church will be issued a determination letter that says the IRS recognizes your church as having exempt status.

Many religious organizations find it beneficial to hire an attorney to help them through this process. While cost may be considered a disadvantage of becoming a 501(c)(3) church, most organizations see it as worth it in the long run.

Conclusion

The fact is your church is already exempt from federal taxation, and your members are making contributions that they may deduct from their taxable income. However, if your church administers many charitable missions and services, it might benefit from the financial transparency that comes with 501(c)(3) tax-exempt status.

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