Church 501(c)(3) Exemption Application & Religious Ministries

The question of "does a church need a nonprofit 501c3 501(c)(3) status?" comes up almost every day, and the short answer and maybe the correct answer is No. There's no good reason to apply for 501c3 501(c)(3) tax exemption for a church as many will claim. And depends on how you look at it, it's very true. Churches are automatically exempt from taxation, period. However, ministries and other religious organizations are not!

If you're wondering how to start a church, a 501c3 501(c)(3) ministry, or even taking it one step further by starting a 501c3 501(c)(3) church with exemption letter from the IRS, you should read all the church articles on this site top to bottom, as these instructions apply to all churches and religious organizations, automatically exempt or otherwise.

I very much doubt the Pope is reading this article to find out how the Catholic Church can apply for 501c3 501(c)(3) tax exemption letter. To the contrary, I think the reader of this article is most likely an honest man, trying to do the right thing in spite of the status quo.

Should You Apply for 501c3 501(c)(3) Tax Exemption for a Church? Are There Any Benefits?

When people think about starting a church, they usually don't think of the legal ramification. To tell you the truth, your church will generally be exempt from paying some federal taxes whether you apply for 501c3 501(c)(3) status or not. On the other hand, it is a myth that applying for 501c3 501(c)(3) status puts undue burden of any kind on your church. Under the law, churches with 501c3 501(c)(3) exemption letter and without are all dealt with equally.

By applying for 501c3 501(c)(3) tax exemption status for your church, you have nothing to lose and much to gain. There are many benefits that a 501c3 501(c)(3) recognized church can receive such as:

1. Eligibility for many grants that otherwise you couldn't apply for. A lot of foundations look for an excuse to not give their grants to churches by requiring exemption letter! Right or wrong, it's the way it is.
2. Eligibility to receive donations  in form of wholesome excess food and food items from restaurants, grocery stores, and supermarkets alike by eliminating the donor's liability under Bill Emerson Good Samaritan Food Donation Act of 1996. This is only applicable to churches that are exempt under 501c3 501(c)(3) section of the internal revenue code by application, not by automatic exemption. 
3. Major nonprofit discounts at many wholesalers, stores, and companies. Almost all companies require documentation showing that your church has a 501c3 501(c)(3) tax exemption letter.
4. Exemption from paying sales tax from other states which do require 501c3 501(c)(3) tax exemption letter.

And business benefits aside, It all comes down to honesty. The most important thing is the message that you send to your congregation by the manner that you form and start your church: Our Church is not part of the corrupt and secretive non-transparent status quo.

501c3 501(c)(3) Tax Exemption for Churches Comes with Transparency

There are two kinds of people in this world, honest people and dishonest people. A church or religious organizations run by human beings are no different.

Being a Christian means more than a social identity. It's a commitment to non-negotiable principles: honesty, transparency, compassion for those in need, treating others as you'd want to be treated, humility, respect, and non-violence.

If you're starting a church, those same standards don't loosen, they intensify. You can't claim to build a house for God while cutting corners on the values He preached. The real foundation isn't concrete or bylaws. It's character.

More and more churches are distancing themselves from the long running non-transparency policy because they're simply sick of hearing that all churches are in the business of embezzling public funds, raping altar boys, polygamy, and tax evasion. We're not talking about transparency to the government, but transparency to the congregation and the general public. You're not asking the IRS for approval, you're telling the public that you have nothing to hide.

I know of many honest and god-fearing pastors who are just fed up with everything because of the conduct of the money-grubbing conglomerate churches who've forgotten what it's like to follow in the footsteps of Jesus Christ. The image your church projects, and the convictions it truly lives by, are entirely up to you.

What Is Considered a Church? What Are the Qualification?

Before starting a church, whether 501c3 501(c)(3) or not, you have to know that not all religious organizations are considered churches. Because special tax rules apply to churches, it's important to distinguish churches from other religious organizations. In these articles, when I use the term "religious organizations," it isn't referring to churches or integrated auxiliaries.

The word church for the sake of tax exemption is not a reference to the Christian Church of any denomination, it encompasses any recognized place of worship including synagogues, mosques, and temples. It's just a collective term the IRS uses in the context of tax exemption.

Religious organizations that aren't churches usually include nondenominational ministries, interdenominational or ecumenical groups, and other entities whose main purpose is to study or advance religion.

Churches and religious organizations can be legally organized in several ways under state law, including as unincorporated associations, nonprofit corporations, or charitable trusts. If you're applying for 501c3 501(c)(3), then it should be a nonprofit corporation.

To qualify for tax exemption as a church, you must demonstrate certain key characteristics, such as:

• a church with a distinct legal existence;
• a church with recognized creed and form of worship;
• church should have a definite and distinct ecclesiastical government;
• formal code of doctrine and discipline;
• distinct religious history (you can't be a church if you just invented your religion);
• membership not associated with any other church or denomination;
• organization of ordained ministers;
• ordained ministers selected after completing prescribed courses of study;
• literature of its own;
• established places of worship (the actual location of the church);
• regular congregations;
• regular religious services (it can't be on and off);
• Sunday schools for the religious instruction of the young; and
• schools for the preparation of its ministers.

The IRS generally uses a combination of these characteristics, together with other facts and circumstances, to determine whether a nonprofit organization is considered a church for federal tax purposes.

What Is an Integrated Auxiliary of a Church?

Besides ministries and churches, there are also organizations that qualify as integrated auxiliaries of a church under IRS rules. An integrated auxiliary of a church is an organization that is affiliated with or controlled by a church, convention, or association of churches, but is not itself a church. These groups often include church-run schools, mission societies, or men's and women's ministries.

In general, the IRS will recognize an organization as an integrated auxiliary of a church if it meets three main requirements related to its relationship with the church, its internal operations, and its nonprofit religious purpose.

These types of organizations must:

• be described both as an IRC (internal Revenue Code) Section 501c3 501(c)(3) charitable organization and as a public charity under IRC Sections 509(a)(1), (2) or (3);
• be affiliated with a church or convention or association of churches; and
• receive financial support primarily from internal church sources as opposed to public or governmental sources.

More guidance as to the types of organizations the IRS will treat as integrated auxiliaries can be found in the Code of Regulations, 26 CFR Section 1.6033-2(h).

This is where the 501c3 501(c)(3) determination letter becomes valuable. It allows you to apply for grants not just for the church itself, but for one of its integrated auxiliary programs, for example, youth outreach, community education, or children's development initiatives.

The same rules that apply to a church generally apply to its integrated auxiliaries, with one major difference: an integrated auxiliary does not share the limited audit protections that churches enjoy. In other words, it's tax-exempt like a church, but it doesn't have the same degree of IRS audit immunity as a church.

Starting a Church with 501c3 501(c)(3) Tax-Exempt Status

Further above, I talked about the automatic tax exemption so let's dig in deeper on what's required for starting a 501c3 501(c)(3) church and how to file a church 501c3 501(c)(3) application.

Starting a Church with Tax Exemption under the Umbrella of a Central or Parent Organization

A new church that's affiliated with a parent organization should first check whether the parent holds a group exemption ruling from the IRS. If the parent organization has a group ruling, the IRS may already recognize the new church as tax-exempt under that umbrella.

Under the group exemption process, the parent organization, sometimes called the "central organization," acts as the holder of the group ruling. It maintains a list of subordinate churches or related organizations covered by that ruling. If your church appears on that list, it's already recognized as tax-exempt and doesn't need to file a separate Form 1023 or request its own 501c3 501(c)(3) determination letter.

If your organization isn't currently covered under the group ruling, contact the parent organization to see if you're eligible to be added to their application or included in future updates to the group exemption list.

Religious Organizations That Are Not Churches

Unlike churches, religious organizations must apply to the IRS for 501c3 501(c)(3) tax-exempt status, unless their gross receipts normally do not exceed $5,000 per year.

How to Apply for Church 501c3 501(c)(3) Tax-Exempt Status

The process of applying for church or ministry 501c3 501(c)(3) exemption through 501c3 501(c)(3) application (Form 1023) is covered in detail throughout this website and it's exactly the same as any other nonprofit. However, churches and religious organizations have somewhat different compliance requirements which I've detailed in the following articles that specifically apply to religious entities:

• Church Charitable Contributions and Donations Regulations & Laws
• Church Ministers Compensation and Salaries Laws & Regulations
• Churches and Unrelated Business Income TAX
• Churches Political Activities and its consequences
• When a Church or Ministry Gets Audited by the IRS

Churches are also required to complete the Form 1023 Schedule A.

Employer Identification Number (EIN) for Churches

Every tax-exempt organization, including a church, needs an Employer Identification Number (EIN), even if it has no employees. An EIN is required for several common activities, such as opening a bank account, being listed as a subordinate in a group exemption ruling, or filing IRS forms like W-2, 1099, or 990-T.

An organization can apply for an Employer Identification Number (EIN) by filing Form SS-4, Application for Employer Identification Number, following the instructions provided by the IRS. If the organization is submitting Form 1023, Application for Recognition of Exemption Under Section 501c3 501(c)(3), the EIN must be included on that form.

501c3 501(c)(3) Application Form 1023 for Churches

When applying for recognition as tax exempt under IRC Section 501c3 501(c)(3), churches and some religious organizations must use the Form 1023. Smaller religious organizations may be qualify for using Form 1023EZ Form 1023-EZ, Streamlined Application for Recognition of Exemption, however I don't recommend it.

A church applying for 501c3 501(c)(3) exemption cannot use the Form 1023EZ Form 1023-EZ.

A religious organization must generally file its Form 1023 application within 27 months from the end of the month when the organization was legally formed. Filing within that window allows the IRS to recognize it as tax exempt and eligible to receive tax-deductible contributions dating back to its formation.

However, if the religious organization happens to be a church, it is treated differently. The IRS can recognize a church as tax exempt from the date it was established, even if its application is submitted more than 27 months later.

This means your church doesn't have to be a new church. Even if your church is 100 years old, you can still apply for church tax-exempt status without worrying about deadlines or penalties. No other type of organization is given this kind of flexibility by the IRS.

The cost of applying for church 501c3 501(c)(3) tax exemption is exactly the same as any other nonprofit organization. The IRS is required by law to collect a non-refundable form 1023 user fee from any organization seeking a determination of tax-exempt status under IRC Section 501c3 501(c)(3).

Church 501c3 501(c)(3) Tax Exemption Status and How You Can Lose It

All Section 501c3 501(c)(3) organizations, including churches and religious organizations, must follow specific IRS rules. Despite what some church leaders claim, these rules DO APPLY to churches that are automatically recognized as tax exempt.

Churches and religious organizations, like many other charitable organizations, qualify for exemption from federal income tax under Internal revenue code section 501c3 501(c)(3) and are generally eligible to receive tax-deductible contributions. To qualify for tax-exempt status, a church or a religious organization must meet the following requirements (covered in detail throughout this website):

• the church or the ministry must be organized and operated exclusively for religious, educational, scientific or other charitable purposes;
• net earnings of church or the ministry may not inure to the benefit of any private individual or shareholder;
• no substantial part of the church or the ministry's activity may be attempting to influence legislation;
• the church or the ministry may not intervene in political campaigns; and
• the church or the ministry's purposes and activities may not be illegal or violate fundamental public policy.

Inurement and Private Benefit of Churches

Inurement to Insiders: Churches and religious organizations are not allowed to use their income or property to personally benefit insiders. An insider is anyone with a personal interest in the church's operations, such as the pastor, officers, board members, or in some cases, employees.

Improper use of church funds or assets includes paying excessive salaries, transferring property to insiders below market value, or distributing profits to individuals. These actions violate federal law for 501c3 501(c)(3) organizations and can result in the loss of tax-exempt status.

The rule is absolute, any amount of private benefit can trigger IRS penalties. Insiders who personally benefit may also face excise taxes and must repay the organization for the improper gain.

Reasonable compensation for legitimate work and fair market payments for goods or services are allowed. What crosses the line is when payments or transfers go beyond what is reasonable or serve private interests instead of the church's exempt mission.

For technical details, see Title 26 of the Code of Federal Regulations, sections 53.4958-0 through 53.4958-8.

Church Private Benefit: A church or religious organization recognized under section 501c3 501(c)(3) must operate solely for charitable, educational, religious, or other exempt purposes. Its activities cannot be designed to serve private interests, whether of an individual or another organization.

The people or groups who benefit from a church's programs should be legitimate charitable recipients, such as the poor, the sick, or the general public. In other words, the church's work must advance its religious mission or provide a clear public benefit, not personal gain.

Private benefit is different from inurement to insiders. Inurement involves people within the church, while private benefit can involve anyone outside the organization who gains from its activities. Private benefit must be substantial to put a church's tax-exempt status at risk. Read the following for further information on what jeopardizes the tax exemption status of a nonprofit organization.

Record Keeping Requirements for Churches

All tax-exempt organizations, including churches and religious organizations, must keep accurate accounting books and records, even if their tax-exempt status has not been formally recognized by the IRS. These records are necessary to support the organization's claim for exemption if the IRS conducts an audit. Churches must also maintain financial records detailed enough to complete any required federal tax or information returns.

There is no specific format for keeping records. However, the types of required records frequently include organizing documents (charter, constitution, articles of incorporation) and bylaws, minute books, property records, general ledgers, receipts and disbursements journals, payroll records, banking records and invoices. The extent of the records necessary generally varies according to the type, size and complexity of the religious organization's activities. Please read the following for further information on 501c3 501(c)(3) record keeping and accounting requirements.

Form 990 Requirements for Churches and Religious Organizations

Generally, all religious organizations must file Form 990, Form 990-EZ or Form 990-N except churches and the following related organizations:

• Inter-church organizations of local units of a church,
• Mission societies sponsored by or affiliated with one or more churches or church denomination, if more than half of the activities are conducted in or directed at, persons in foreign countries,
• An exclusively religious activity of any religious order

Please read the following for further information on who must file the form 990 information return.