Should a Church Apply for 501(c)(3) Exemption Status?

November 2, 2022

To be or not to be?

Should a Church Apply for 501(c)(3) Exemption Status, and Should it Operate as a Corporate Entity?

One of the first decisions that must be made when starting a new church is whether to pursue 501(c)(3) exemption status. The Internal Revenue Code 501(c)(3) is a specific tax category for nonprofit organizations (i.e., a church) that confirms they meet the requirements for tax-exempt status. It is important to note that the status is accompanied by compliance restrictions, as 501(c)(3) organizations are highly regulated entities. Primary restrictions included in obtaining and maintaining 501(c)(3) status include: restrictions on lobbying, endorsing candidates, or legislative activity, assurance that all assets are permanently dedicated to charitable purposes (even in the case of dissolution), and no activities or earnings may unfairly benefit an individual in the organization. However, churches, as religious organizations, are, per the IRS, “automatically considered tax-exempt and are not required to apply for and obtain recognition of exempt status from the IRS under 501(c)(3)”. Which begs the question, if your church can claim tax-exemption without obtaining 501(c)(3) status, then why do it and what is the distinction between a 501(c)(3) church and a non 501(c)(3) church?  

501(c)(3) Requirements

It is important to understand what is required for a church to acquire distinct legal existence for federal tax purposes. General attributes developed by the IRS in which a church must adhere to be incorporated as an exempt entity are as follows: recognized creed and form of worship, definite and distinct ecclesiastical government, formal code of doctrine and discipline, established place of worship, regular religious services, etc. For tax purposes, a “church” includes all places of worship including Christian churches, temples, mosques, synagogues, and others that conform to the attributes of such. What makes a formally recognized church unique from other nonprofits is its ability to be presumed as a religious organization by the IRS, and therefore qualify for automatic tax exemption.

If a church applies for and obtains 501(c)(3) status, it is officially recognized by the IRS as opposed to operating solely under the presumption of tax exemption as a religious organization. When the congregants/donors of a church with 501(c)(3) status give, their donation is then automatically tax-deductible. Tithes to a church without 501 (c)(3) recognition are not automatically deemed tax-deductible, which is essential only if one who is giving to the church gets audited by the IRS. A church claiming exempt status, without official 501(c)(3) recognition, leaves their congregants with the burden to prove that the church in which they are giving satisfies the exemption requirements stated above in order to be deemed tax-deductible.

Though one can exist as a church with or without obtaining 501(c)(3) status, many potential church leaders may also want to know how they can protect themselves from the personal liability arising out of operations from the church. If one chooses to operate as an unincorporated entity as opposed to under a corporation, there is the possibility of subjecting oneself to significant personal liability. However, some may also ask, if they choose to operate as a corporation, rather than an unincorporated entity, they are then required to obtain 501(c)(3) status, or if it will still be considered automatically tax-exempt as a religious organization. According to the IRS, if a corporation is operating as and recognized by the government as a religious organization, pursuant to the requirements listed above, it would be deemed tax-exempt. The Articles of Incorporation state that such a corporation would be organized under the Nonprofit Religious Corporation Law and created exclusively for religious purposes, making it qualify for automatic tax-exemption, even as a corporation. In short, operating a church as a corporate entity provides it leaders protection from personal liability, while still offering automatic tax-exemption as well as the option to apply for 501(c)(3) status for added protection for the church’s congregants.

In conclusion, from a legal perspective, we believe it is best for leaders to choose to operate under a corporate entity. This protects the leaders from personal liability in most cases. Obtaining 501(c)(3) status does subject one’s church to more governmental oversight but also gives its congregants the benefit of tax-deducted giving without providing further justification upon auditing. Ultimately, the decision is up to church leadership and what will be most beneficial to their operation and congregation.

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