If you ever wondered about the 501c3 rules for churches, you are not alone. Your church should be an important part of your life and as such whether you are helping to begin a new church, just curious as to how your church operates, or perhaps on a board or committee that decides church polity, knowing a bit about 501c3 rules for churches is important.
IRS 501c3 Rules for Churches
The responsibility of church leadership, including its legal matters, is a testimony to Christ Jesus Himself. May this article concerning a brief overview of 501c3 rules for churches help you in your role of your church to be informed.
This is part of what the Apostle Paul meant when said to Timothy, “But if I tarry long, that thou mayest know how thou oughtest to behave thyself in the house of God, which is the church of the living God, the pillar and ground of the truth.” – 1 Timothy 3:15 (KJV)
What is important considering the legal administration of your local church is that those who govern it, the pastor, the board of directors, and even all of the members of the congregation, be subject unto Christ according to Ephesians 5:24. God knows all about government. He instituted human government and He is well aware of such things as 501c3 rules for churches and much more.
This article is not intended for legal advice or is it comprehensive. The decision to apply for 501c3 status for your church, or not, needs to be carefully considered while seeking professional advice from an accountant, tax advisor, or other legal professional.
With this disclaimer, here is some general information concerning 501c3 rules for churches.
What Is 501c3 Status?
The 501c3 is a United States Internal Revenue Service tax code that refers to a nonprofit organization. The Internal Revenue Code Section 501c3 offers churches, religious institutions, charitable organizations, and other nonprofit organizations in the United States a pathway to federal tax-exempt status.
Obtaining a 501c3 status for your church offers some financial benefits other than being tax-exempt. At first glance, it may seem like a great way to save money and be good stewards of what God has given, but with all things, some drawbacks need to be carefully considered before filing the necessary paperwork to obtain this status.
Understanding 501c3 Status
501c3 status is a federal tax-exempt designation that can be obtained by nonprofit organizations, including churches. While not mandatory, this status brings forth a range of significant benefits as well as considerations that need careful, and prayerful, evaluation.
Benefits of 501c3 Status for Churches
1. Proof of Satisfying Necessary Requirements:
When a church or any other religious nonprofit organization has 501c3 status, this is the official recognition of exempt status.
2. Tax-Deductible Donations:
A church, as a charitable organization, operates by receiving financial gifts, offerings, and tithes from its members. Also, some churches participate in fundraising activities.
Just a word of caution – a church that persists in selling items for a profit, to raise money for their religious institution and use their tax-exempt status as a way to avoid paying or charging state sales tax can be perceived as being more of a business rather than a place dedicated for worship or even a charitable organization.
Having a 501c3 status may benefit the church since donations to a 501c3 entity are considered a charitable deduction and is a tax deduction that would give the donors their tax benefits.
Making the 501c3 status public can help the church raise money, especially from non-church members. Official 501c3 status signals to donors that the church has been recognized as charitable by the IRS, which builds trust, especially with non-church members.
3. Property Tax Exemption:
A church must have a property on which to build and operate. Having an IRS determination letter may make it easier for the church board members to obtain new church property at a fair market value. This could be beneficial when either starting a new church or moving the existing place of worship.
4. Financial Benefits:
The 501c3 status also allows churches to utilize reduced postal rates, and a variety of discounts which also contribute to the financial expenses of operating a church. Also, the 501c3 may allow the church additional tax exemptions.
5. Online Giving Fee Reduction:
It may be just a small perk, but churches with 501c3 status have lower transaction fees for online donations.
Considerations and Potential Drawbacks:
1. No Private Ownership:
501c3 churches cannot be privately owned or sold like businesses. A church should be God’s business, it is not for anyone’s profit, therefore this rule should not be a problem. Unlike a business, a church is not formed or operated for the sole purpose of making private individuals rich.
2. Political and Lobbying Restrictions:
A 501c3 church is severely limited in its involvement in politics. A church participating in political campaigns and lobbying activities would cause it to forfeit its federal tax-exempt status. This consideration seems at first fair but, if or when, the law of the land seems to be contrary to God’s law, this clause may effectively impair free speech.
By agreeing to all of the 501c3 rules for churches, including this one in particular, it may be those who seek the 501c3 status for their church are voluntarily signing away their Constitutional right of free speech which may be needed in the future.
3. Limited Purpose and Compliance:
For a church that has agreed to the legal limitations of the 501c3, it must abide by the laws. A church that would violate the agreed upon 501c3 rules for churches can result in the loss of nonprofit status and incur Unrelated Business Income Tax (UBIT).
4. Loss of Privacy:
While exempt from some documentation, 501c3 churches must be willing to have public inspection of their financial dealings. A church should not participate in any illegal activities and therefore have nothing to hide from public disclosure of financial information.
As with any type of organization that receives money and pays bills, careful attention to record-keeping should be maintained, whether or not you have a 501c3 status in your church, make sure you have an exceptional bookkeeper, even if you have to invest the money to pay an accountant.
If you desire a more consistent and deeper prayer life, check out My Prayer Journal Notebook.
Easily Obtain a 501c3 Status for a Church:
If you are convinced that a 501c3 status is right for your church, it is easy to get one. The steps are outlined below. But even with the ease of application, it is still in the best interest of all of the church’s congregation to seek professional legal, tax, and even spiritual advice before proceeding.
It may be tempting to save the church some money to just do it yourself. It is best as you seek to honor God by serving in His church to prayerfully seek human, spiritual, legal, and Godly counsel, even if you need to pay for it, you may be investing in the future of your church.
Here are the basic steps of the application process to obtain a 501c3 status for your church or religious organization:
1. Obtain An EIN:
· Acquire an Employer Identification Number (EIN) for the church.
2. Submit the necessary IRS Form:
· Complete and submit IRS publication Form 1023 or Form 1023-EZ to apply for tax-exempt status.
3. Wait for IRS review:
· Allow the IRS to review the application.
4. Get the Exempt Organization Determination Letter:
· Upon approval, obtain the Exempt Organization Determination Letter.
Congratulations! Your church is now officially recognized as a 501c3 tax-exempt entity.
Do Churches Need to File for 501c3 Status?
According to the United States government, especially Publication 557 a church is already exempt from federal income tax and can receive tax-deductible contributions.
“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.”
So the federal government does not require a church to have a 501c3 status and still operate as a church, for all religious purposes. Without the 501c3 status, a church would have fewer financial saving perks, but they would be preserving their First Amendment rights.
Acquiring the official determination letter does help the church to save some money, but those considering the 501c3 statues for their church need to carefully, and prayerfully consider what is best not only for the present but also for the future of their organization.
All churches despite their 501c3 status, still need to comply with local rules and regulations that do not violate public policy. This should not be a problem, since a local church, should strive to honor its Head, Christ Jesus. This is a good testimony in the public sector.
The decision for a church to pursue 501c3 status involves careful consideration of both benefits and potential drawbacks. A well-informed approach which includes seeking Godly legal counsel, ensures the congregation’s trust and the long-term success of the church.
For more information about the pros and cons of 501c3 rules for churches and what would be best for you, in your particular situation, here are some resources:
To be transparent, I am not associated with any of the associations mentioned above. Rather I found them in researching the 501c3 rules for churches for this article and found that although most religious organizations and churches are considered 501c3 entities, other church leaders have very strong opinions against being a 501c3 church.
Their reasons should be considered as well. The question is still – do the advantages of a 501c3 church outweigh the disadvantages of a 501c3?
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