Internal Revenue Code 501c3 is a United States tax law designated for nonprofit and charitable organizations. Religious organizations, including churches, are eligible by the Internal Revenue Service (IRS) to apply for, and obtain, a determination letter from the IRS, which then would formally make them a tax-exempt organization.
A 501c3 designation is important for tax-exempt organizations, nonprofit organizations, and even private foundations to be recognized by the federal government as tax exempt organizations. Once a corporation is formally recognized with a nonprofit status, they are officially tax exempt. This is a huge reason why nonprofit organizations, such as charities and those founded primarily for educational purposes, want to obtain the 501c3 designation.
Other benefits of the 501c3 are that these nonprofit organizations can also apply for, and receive, government grants and funding. The 501c3 status also gives an organization increased credibility with their donors and supporters. But along with the perks, especially financial, there are some serious considerations and disadvantages of 501c3 for churches.
The definition of a church is a local, religious assembly that Jesus Christ Himself ordained. The religious organization called “church” should be ultimately under the spiritual control of Jesus Christ.
In Matthew 16:18, is the first mention in the Bible of “church.” Jesus Christ Himself said “…upon this rock [meaning Jesus Himself] I will build my church and the gates of hell shall not prevail against it.” (KJV) This verse both introduces the concept of the church and shows that it is an unique entity under the auspices of God Himself, which makes the local church different than most other public charities.
Disclaimer
Before making the decision as to the advantages or considering the possible disadvantages of 501c3 for your church, you must carefully, and prayerfully, consider your church services and its aim. This article is not to be taken as legal counsel or legal advice or used as a final determination concerning any detailed information that would be right for your church. Rather, this article is simply to educate readers as to some of the disadvantages of 501c3 for churches.
Disadvantages of 501c3 for Churches — Federal Income Taxes
One of the main reasons a church may desire to obtain a 501c3 status is so that it has the tax benefits of other tax-exempt organizations, so that it doesn’t have to pay federal income taxes.
Tax Exempt or Non-taxable Status
Some churches feel that they need 501c3 status in order to obtain a tax-exempt status to be legally considered a nonprofit corporation. Any entity that is tax exempt means that someone has the authority to tax it, or in the case of 501c3, to grant an exemption from taxation. But unlike other tax-exempt organizations, a church is, by definition, non-taxable. It cannot be taxed, and this ruling is under the laws of the United States of America.
Specifically, according to the IRS website “…a church, its integrated auxiliaries, or a convention or association of churches isn’t required to file Form 1023 to be exempt from federal income tax or to receive tax deductible contributions”
On the contrary, when a church is granted a 501c3 status, what the church is saying is that it can be taxed. Church leaders, by seeking a 501c3 determination letter, are asking permission from the state for their church not to be taxed. But by legal definition already given, churches and even associations of churches are non-taxable entities, they already have federal tax exemption.
Contributions ARE Tax-Deductible
All charitable contributions to a church are tax-deductible contributions for the donors, despite whether or not the church is officially recognized as a 501c3 entity. Since a church operates for religious purposes, churches are by definition non-taxable, and any contributions given are a tax deduction for the donor. Therefore, a 501c3 is not needed for a church.
One of the responsibilities of a church is to give its donors an annual contribution letter, which serves as a receipt for what was donated to the church by the individual, including both financial amounts and also, when applicable, any goods or services. This particular tax document, which is proof of a donor’s charitable contributions, is filed with their tax IRS form with all of their other documents needed for their annual return. Like any other tax document, this letter should be kept by the donor for at least 6 consecutive years.
Instead of living and trying to serve God in fear of offending the government by willingly placing your ministry under such a tax law, it would be far better, and much easier, to claim the status of your church as being nontaxable, rather than tax exempt.
Disadvantages of 501c3 for Churches — Lack of Privacy
A public disclosure of finances should not be a problem for any church. The financial records of the church should be kept accurately, honestly, and in an orderly manner, with the church not worried over any public scrutiny. After all, a church should be under the ultimate headship of Jesus Christ, God Himself, and a church, just like an individual, needs to be a good steward of what God has entrusted them with, including finances. There should be nothing the church feels they need to “hide,” either from the government or from God. Since Christians are to obey the laws of the land this should not be a problem.
Public Disclosure of Finances
But regardless of any and all honesty, a church, in seeking approval from the state by obtaining 501c3 status, is actually doing a disservice to itself. It is indirectly asking for more scrutiny from the government. Just because a church should have nothing to hide, does it really want to attract government attention, and public inspection, as it must allow government officials, even those who are anti-God or Bible, to carefully examine their financial records? A church should always have nothing to hide from any governmental body.
Lack of Privacy
The information asked for in the application of a 501c3 includes contact information, including the addresses of all board members. This information is open to any person or organization who requests it. If you, as a church member, agree to serve on your church’s board and they are a 501c3 organization, your personal contact information is obtainable by any person or organization who requests that information, including those who may be hostile to God, His Word, and His work.
Disadvantages of 501c3 for Churches — Penalties and Fees
A church that is formed for other things, including charitable purposes, desires to save money, but there are downsides for churches to pursue this option for them.
Fees
One of the seeming advantages of having a 501c3 designation is for either the church to save money or through the acquisition of grants available to non-profit organizations in order to get “free” money. But just applying for a 501c3 status is expensive. The average cost of a 501c3 application is $597.50. This is just the application alone, not any related legal fees.
Penalties
Once a church has been designated 501c3, it must disclose detailed information to the public scrutiny of governmental authorities so taxing officials can accurately discern that the church is abiding by the rules of its incorporation. If, after thorough examination, it is found if your ministry has even a single, small, unintentional, and seemingly insignificant violation, your church can lose its coveted tax-exempt and nonprofit status. If this occurs, the donations given to the church will no longer be tax-deductible contributions. This would both make the church look bad, not to mention causing major problems, especially to those who have donated to the church. Their once tax-deductible donations will now be taxable.
Disadvantages of 501c3 for Churches — Incorporation
When any church starts the application process for a 501c3 status, they have to take the first step with the end goal of becoming a corporate entity.
Licensing
Incorporation is a form of licensing. A church, when it becomes incorporated, means that it has both asked for, and also received, permission from the state of its residence to operate. It is then a “public accommodation” rather than a “private religious body,” and is allowed to operate under the auspices of the state. Does a church really want to be allowed, and continue to need permission from the government to operate when it has been ordained by God (a much Higher Power than the state) to function?
“A creature of the state”
When a church decides to file for 501c3 status, it will become a corporation — an artificial body allowed to exist under the state. Incorporation is good news for most nonprofit organizations, even religious and charitable ones. But churches, despite being lumped into the category of religious organizations and/or charitable organizations, are actually a different entity.
There is some interesting, even frightening, in the language regarding churches becoming corporations, according to the 1905 Hale Vs. Hendke, 201 United States. Here is the quote: “…the other hand, the corporation is a creature of the State. It is presumed to be incorporated for the benefit of the public. It receives certain special privileges and franchises, and holds them subject to the laws of the State and the limitations of its charter. Its powers are limited by law. It can make no contract not authorized by its charter. Its rights to act as a corporation are only preserved to it so long as it obeys the laws of its creation”.
Reading the above definition of a corporation, a church who values their religious freedoms given to them by God and guaranteed by the U.S. Constitution and Bill of Rights, should find those words a solemn warning about pursuing incorporation.
Protection from Egypt?
One of the seeming advantages of a church becoming a 501c3 entity is for protection against being sued. Once a church is incorporated, there may be some protection from lawsuits.
But the “protection” granted by the 501c3 status is from the state, not from God. God uses people, and even governments, to do His will. But some pastors of churches see the protection offered by the 501c3 as trusting in the wrong source of protection. Some say this is similar to the Israelites asking for protection from their enemy, the country of Egypt, rather than trusting in God to keep them safe.
They cite the Bible passage:
Isaiah 31:1-3
“Woe to them that go down to Egypt for help; and stay on horses, and trust in chariots, because they are many; and in horsemen, because they are very strong; but they look not unto the Holy One of Israel, neither seek the LORD! Now the Egyptians are men, and not God; and their horses flesh, and not spirit. When the LORD shall stretch out his hand, both he that helpeth shall fall, and he that is holpen shall fall down, and they all shall fail together.” (KJV)
Just because a church is incorporated does not mean that it is guaranteed protection from any lawsuit. In some cases, the fact that the church is a corporation, rather than strictly a religious organization, may actually hinder a favorable legal outcome for the church. When a church is incorporated, it then becomes a business, in particular, a nonprofit corporation. A business is a different entity than a church. Corporations, including incorporated churches, can be sued.
Disadvantages of 501c3 for Churches — Limited Political Activities
A very common argument against attempting to pursue a 501c3 determination for church is the fact of limited political activity and involvement. How political your church wants to be should be at the discretion of the pastor and the congregation. Many churches shy away from politics since the topic can become a very heated one. But when a church voluntarily gets the official recognition as a 501c3 entity, part of the price is voluntarily giving up their freedom of speech in the political arena.
While some churches erroneously cite “separation of church and state” as a reason not to get involved in politics, and have not gotten involved in any political campaigns in the past, they may not find it concerning that in pursuing a 501c3 ruling they are taking the first step in giving up their right of free speech.
Religious groups, which shy away from politics by citing “separation of church and state,” make an erroneous statement. The definition of “separation of church and state” simply refers to the First Amendment of the United States Constitution, which “forbids Congress from both promoting one religion over others and also restricting an individual’s religious practices. It guarantees freedom of expression by prohibiting Congress from restricting the press or the rights of individuals to speak freely.”
A church that may desire to be nonpolitical now, may in the future desire to change its position and its outreach, depending on the political climate. There may come a time when a church may want to get more involved in politics in order to protect or further their religious practices. But for a church that has a 501c3 determination, it has effectively silenced it’s political voice on perhaps crucial political issues in the future.
Disadvantages of 501c3 for Churches — Board of Directors
When an entity becomes incorporated, the same entity by law requires it to have a board of directors. Most churches do have some sort of governing body composed of church leaders, and this same group of people can effectively act as a board of directors and fulfill that requirement. But again, a church is a different entity than other nonprofit organizations. The board of directors, led by a resident agent, most commonly, the pastor, is then responsible to answer to the state for the activities of his/her church.
When God set up His requirements for a local church, He did not include a board of directors. A local church does need leadership from its pastor. The requirement for a board of directors, while may be helpful to a church, is a requirement of man, not of God. This is another requirement that forces a church, a spiritual organization, to conform and act as a business entity.
A Better Legal Way to Form a Church — 508c1a
After examining the various disadvantages of 501c3 for a local church, there is an alternative method for legally setting up a church. That is by having a church to be a 508c1a entity. For more information about this particular option, one of the starting places is Helping Hand outreach.
For more information about the topic of a church being a 501c3 entity, read the article: Some Considerations of IRS 501c3 Rules for Churches.
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