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.
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 that the government can’t.
What is 501(c)(3) Exemption Status?
In short, if an organization, including churches, receives 501(c)(3) exemption status from the IRS it is recognition that they are exempt from federal income and property taxes. In addition, donors who make charitable 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 IRC 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 their exempt status. What most people don’t realize is that churches and non-profits exist under this definition whether or not they have officially received 501c3 status from the IRS.
So, Why Get the Status?
While 501(c)(3) status is not a necessity for churches, it does have benefits.
- The IRS recognition gives added assurance to church leaders, members, and contributors that the church is recognized as exempt and their contributions generally are tax-deductible.
- 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 donors are able to gain an essential understanding of the organization and determine whether or not he/she would like to make a charitable contribution. 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) 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:
- 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.)
- File the IRS Form 1023 (PDF): Submit this and a filing fee (amount determined by the average yearly gross receipts).
- Receive IRS approval: Your church will be issued a determination letter that says the IRS recognizes your church as having exempt status.
Many organizations find it beneficial to hire an attorney to help them through this process.
The fact is your church is already exempt from federal taxation and your members are making donations 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) exemption status.