Tax Exemptions for Churches and Religious Organizations
Churches hold tax-exempt status, but the regulations that apply to churches and religious organizations differ from other public charities. Because of this, it is vital for organizations to know whether they meet the requirements for a church and the regulations that apply to churches. Not understanding the requirements can lead to unnecessary risks and legal consequences.
What does the IRS classify as a church?
Churches automatically have tax-exempt status from the IRS due to the separation of church and state. Therefore, it is necessary to define who or what is a church and what is not. Religious organizations that don’t meet the criteria to be classified as a church need to apply for tax-exempt status and follow all IRS filing requirements.
It is important to note that while some churches hold 501(c)3 status, not all 501(c)3 organizations with religious missions qualify as churches. In some court cases questioning the classification of particular organizations, the courts have adopted a list of 14 criteria, or characteristics, that help guide the determination of what is and isn’t a church for tax purposes.
These 14 criteria are:
a distinct legal existence,
a recognized creed and form of worship,
a definite and distinct ecclesiastical government,
a formal code of doctrine and discipline,
a distinct religious history,
a membership not associated with any other church or denomination,
an organization of ordained ministers,
ordained ministers selected after prescribed studies,
a literature of its own,
established places of worship,
regular congregations,
regular religious services,
Sunday schools for the religious instruction of the young,
and schools for the preparation of its ministers.
Organizations must be able to meet the requirements of the 14-point test in order to be classified as a church in the eyes of the IRS. This distinction is critical, because churches are not subject to property tax or paying sales tax. They do not have to file paperwork for tax-exempt status and are not subject to the same reporting requirements as other 501(c)3 organizations.
Can a church still file a Form 1023?
Form 1023 is the paperwork organizations must file to request recognition as a 501(c)3 organization. As stated, churches are automatically granted 501(c)3 status with the IRS. However, churches that do not file a Form 1023 will not be included on the IRS website of public charities. Some churches want to be included on the website for the sake of reassuring donors that their gifts are tax deductible.
If a church would like to appear on this website, they may file Form 1023. Filing churches must also complete a Schedule A form, which asks questions related to meeting the criteria of a church.
What are the guidelines for tax-exempt churches?
There are various limitations on tax-exempt churches. The IRS has several pages dedicated to helping churches understand the guidelines, including Pub 1828, which can answer questions and further explain the regulations and benefits of being a church.
Some of the guidelines are similar to restrictions placed on other 501(c)3 organizations regarding money usage and political activity. Because any funds the church uses are tax exempt, there are limitations on how funds are used. Specifically, funds may not be used to benefit a private citizen or shareholder.
“Because any funds the church uses are tax exempt, there are limitations on how funds are used.”
Politically, churches must not support or oppose specific political candidates. This includes endorsing or opposing them from the pulpit, church media, or other communication channels. Some lobbying and support of issues may be allowed, but it must not be a substantial part of its activities. All resources used toward lobbying must be tracked, including funds, volunteer time, and other resources, to determine if the lobbying is a substantial part of the activities.
While religious leaders within the church may be politically active and support or oppose candidates individually, they cannot be acting on behalf of the church organization when they do so. It is recommended that individuals clearly state they are speaking on behalf of themselves personally when they engage in political support or opposition.
What risks exist for churches with tax-exempt status?
All churches need to be familiar with Pub 1828, which helps churches navigate the legal requirements of their tax-exempt status. In addition to the general guidelines, it provides information on consequences for not following them and how to correct if a church realizes it has stepped past a guideline.
Most churches are legal corporations within their states, and they are subject to all the regulations surrounding corporations. This varies by state, but in Oklahoma they are subject to the Oklahoma General Corporation Act. This act dictates that they need good governance and should follow best practices surrounding it. There must be a board of directors/trustees that has fiduciary responsibilities, and the church needs to ensure its board is fulfilling those responsibilities.
Being automatically tax-exempt does not exempt churches from following the law and complying with IRS guidelines. Not following guidelines still creates risk of losing their tax-exempt status and may also carry financial consequences for the organization. All churches must take the time to ensure they are familiar with the rules and regulations surrounding their tax-exempt status.
