Does a Church Need 501(c)(3) Status?

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Exploring the Benefits and Drawbacks of applying for 501(c)(3) status with the IRS

Section 501(c)(3) of the Internal Revenue Code grants federal tax-exempt status to churches and religious organizations. While it’s not mandatory for churches to secure this designation by applying through the IRS, registering as a 501(c)(3) nonprofit organization offers several significant advantages.

We’ll explore the advantages and disadvantages of applying for 501(c)(3) for your church, as well as tips on how to start the application process.  

What is 501(c)(3) Status?

501(c)(3) status refers to a provision in the U.S. Internal Revenue Code that grants nonprofit organizations, including charities, educational institutions, and religious entities, exemption from federal income tax. Organizations classified under this status are also eligible to receive tax-deductible charitable contributions. To qualify, churches must meet the requirements laid out by the IRS, such as 1) being organized and operated exclusively for religious, charitable, or education purposes, and 2) not engaging in lobbying or political campaign activities. 

Do Churches Need This Status to Be Tax-Exempt?

No, churches do not need to have 501(c)(3) status to enjoy federal tax exemption. By default, churches are considered tax-exempt under the IRS guidelines as long as they meet the basic requirements of a religious organization. You can read this article from the IRS for more information. However, even if a church does not file for 501(c)(3) status with the IRS, it must still adhere to the rules surrounding tax-exempt organizations.

What Are the Benefits of Having 501(c)(3) Status?

While churches are inherently tax-exempt and can also receive tax-deductible donations, obtaining formal 501(c)(3) status can provide additional benefits:

  • Enhanced Public Trust: Formal recognition by the IRS can increase credibility and public trust, making it easier to solicit donations.

  • Eligibility for Grants: Many government and private grants require 501(c)(3) status as a prerequisite for funding.

  • State Tax Exemptions: In addition to federal tax exemptions, 501(c)(3) status can make it easier to qualify for state tax exemptions and other benefits.

  • Trust with Potential Lenders: Churches with 501(c)(3) status generally have an easier time financing a building or renting a property than churches without the designation. 

  • Discounts: Churches that have received a 501(c)(3) determination letter from the IRS are eligible for discounts from businesses. TechSoup is one such company that offers these discounts, such as reduced costs for subscriptions like Quickbooks Online or Microsoft Office. Churches with  501(c)(3) status may also be able to receive lower processing fees from online giving platforms.

  • Postal Discounts: Reduced postal rates are available for bulk mailings.

What Are the Drawbacks of Having 501(c)(3) Status?

Despite its advantages, there are some minor downsides to consider:

  • Records Open to the Public: Financial records and operational aspects of organizations with 501(c)(3) status are subject to public disclosure, which can deter some churches that prefer privacy. This only includes basic information, such as when the church was formed.

  • Greater Restrictions on Political Activities: 501(c)(3) organizations are restricted from engaging in political campaigns and substantial amounts of lobbying. Many of these restrictions also apply to churches that have not filed for 501(c)(3) status.

  • Limitations on Purpose: Churches with 501(c)(3) status must adhere to specific restrictions outlined by the IRS, such as protections to ensure the organization is organized for religious purposes and does not exclusively benefit certain individuals or parties financially. Deviating from these restrictions can result in the loss of their nonprofit status. Additionally, generating revenue outside of the church’s defined purposes may lead to Unrelated Business Income Tax (UBIT).

What Are the Basic Steps to Apply for 501(c)(3) Status?

For churches that decide to pursue 501(c)(3) status, the application process involves several steps:

  1. Apply for an Employer Identification Number (EIN): Even if the church does not have employees, it needs an EIN to apply for 501(c)(3) status.

  2. Prepare Organizing Documents: These include the articles of incorporation which must contain a purpose clause and a dissolution clause aligning with IRS requirements.

  3. File Form 1023: The application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code (Form 1023) must be completed and submitted to the IRS, along with the appropriate fee.

  4. Await Determination: After reviewing the application, the IRS will issue a determination letter that confirms the church’s tax-exempt status.

While 501(c)(3) status is not mandatory for churches, it can enhance their ability to function effectively as community-focused organizations. Each church should carefully consider both the benefits and the responsibilities that come with 501(c)(3) status to make an informed decision that aligns with its mission and operational needs.

 

Interested in applying for 501(c)(3) status but not sure where to start? We can help. Contact us for more information on how to get started.

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