I get a lot of questions regarding this topic. While I’m not a financial advisor, CPA, or stayed at a Holiday Inn Express and pretended to be – I have planted a few churches. Be sure and check with your CPA to stay up on the latest news regarding this subject.
Here are answers to some of the most asked questions – as best I know 🙂
Does Your Church Need 501 C-3 Status?
The short answer is no!
The Internal Revenue Service (IRS) section 501c-3 states that churches or religious organizations are exempt from federal government taxation. Here are the new church guidelines that you need to understand for tax-exempt status.
Why Is Church Tax Exemption Status Important?
Most churches are able to tend to the financials through tithes and offerings from the local church members. By securing 501(c)3 status, however, you are able to tell potential donors that may not attend your church that their contributions are indeed tax-deductible.
What Records Does a Church Need to Keep?
Your church must keep records that justify its claim for tax-exempt status under the IRS section 501c-3. These records include:
- Banking records
- General ledgers (to track donations) – There are numerous companies that specialize in this area of record keeping. Our friends at Faithteams.com are great at what they do and are highly recommended.
- Minute books (from Board meetings)
- Payroll records
- Property records
Are Churches Automatically Tax Exempt?
The IRS says that churches are automatically considered tax-exempt if they meet the 501c-3 requirements. So, you do not need to apply for and obtain IRS recognition of tax-exempt status. Qualifications for automatic tax exemption status include:
- Not Organized or Operated for Private Interests: According to the IRS, your church “must not be organized or operated for the benefit of private interests, and no part of a 501(c)(3) organization’s net earnings may inure to the benefit of any private shareholder or individual.”
- Limited Political Campaign Intervention: Your church is allowed to lobby, but according to 501c-3, it must not be a substantial part of your church’s activities. Failing the IRS’s expenditure test will either impose an extra tax on your church or will cause you to lose tax-exempt status.
Your church risks losing its automatic tax-exempt status should the IRS determine that you have violated these restrictions. And although a 501c-3 application is not required for churches that meet the section’s requirements, getting the official IRS recognition gives your church added assurance of its status.
So let’s get very practical…
How Does a Church Obtain Tax Exemption?
The IRS has a Tax Guide for Churches and Religious Organizations that details how you can obtain 501c-3 tax exemption status:
- File Form SS-4: This form allows you to request an Employer Identification Number (EIN) from the IRS. Organizations must obtain an EIN whether or not they have employees.
- File Form 1023: You must submit this form along with a filing fee, which will depend on the average annual gross receipts.
- Obtain IRS Approval: The IRS will issue your church a letter that determines its tax exemption status if everything is correct.
A church automatically has 501c-3 tax exemption status if it meets the established guidelines. However, you can still obtain tax exemption recognition from the IRS to formalize your church’s status. To keep this status active, your church must continue to comply with the rules.