Is a Church a Nonprofit?
In the US, churches are inherently recognized as nonprofit entities. This classification is based on federal law, which views religious organizations as organized for religious purposes without the intention of generating profit.
Because they’re a tax-exempt nonprofit organization, churches can benefit from certain tax privileges. For example, they don’t have to pay federal income tax since they're classified as charitable organizations. In some regions, they are also exempt from property and state sales tax.
However, there's an essential distinction to note: while every church is automatically considered a nonprofit, not all possess the 501c3 tax-exempt status.
Obtaining this status involves a specific application process with the IRS. Once a church receives an IRS determination letter granting 501c3 status, it offers churches additional benefits, such as allowing donors to make tax-deductible contributions.
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Distinctions Between Churches and Other Nonprofits
While all 501c3 organizations have similarities, there are distinctions between churches that receive tax-deductible contributions and other nonprofit organizations:
- Automatic Tax Exemption: Unlike other nonprofits, churches are automatically considered tax-exempt but can further solidify this status with formal 501c3 recognition.
- Less IRS Scrutiny: Churches aren't required to file Form 990, which other nonprofits must per the US Tax Code, but they can choose to do so voluntarily.
- Distinct Charitable Purpose: While other nonprofits can serve various causes, churches specifically cater to religious purposes and their congregation's spiritual needs.
Preliminary Eligibility Criteria for Church 501c3 Status
For a church to be eligible for 501c3 status, it must:
- Serve exclusively for religious purposes and hold regular religious services.
- Avoid operations primarily benefiting private individuals and church leaders.
- Ensure net earnings aren't used to benefit any private shareholder or person.
- Refrain from being a political organization or used to influence legislation.
- Not participate in or oppose any political campaign related to candidates for public office.
- Comply with Internal Revenue Code Section 501(c)(3).
501c3 Status: Pros and Cons
Churches are inherently recognized as tax-exempt in many states without needing to file for 501c3 status, so when considering how to structure a church in terms of its legal and tax status, it's important to weigh the benefits and drawbacks of basic nonprofit status against obtaining a 501c3 designation.
Here's a breakdown of the pros of obtaining 501c3 status:
- Clear Donor Benefits: Donors are assured of tax-deductible contributions to save on paying federal income taxes, possibly leading to more and larger donations.
- Broad Recognition: Provides assurance to other organizations, grant-making bodies, and the general public of the church's tax-exempt status.
- Eligibility for Grants: Some grants or public funds are only available to 501c3 entities.
- Additional Tax Exemptions: Being a 501c3 often qualifies churches for state tax breaks, including property, sales, and income tax exemptions. This can lead to significant savings and more funds directed toward the church's mission.
Some of the cons include:
- Criteria: To receive tax-exempt status, churches must fall under the 501c3 criteria set forth by the IRS.
- Paperwork Intensity: The process to obtain 501c3 status requires a significant amount of paperwork and can be time-consuming.
- Costs: There are application fees associated with obtaining 501c3 status.
How to Establish a Church with 501c3 Status
Establishing a church with a recognized 501c3 status ensures tax exemptions and donor incentives. Below are the basic steps for forming a 501c3 in your state:
- Draft Your Bylaws: These are the guiding principles of your church. Ensure they're in line with 501c3 requirements.
- Incorporate: Start by forming a nonprofit corporation in your state. This typically requires Articles of Incorporation and a small fee.
- Apply for an EIN: Obtain an Employer Identification Number (EIN) from the IRS, which is essential for the next step.
- Fill Out IRS Form 1023: This IRS form is critical. Ensure accuracy, as mistakes can lead to delays or denials. Read our free guide on filing Form 1023-EZ to see if you qualify for filing this simpler version of the form.
- Wait for IRS Approval: Once submitted, the IRS will review your application. Once you receive approval, your church will gain 501c3 status.
Are churches automatically considered 501c3 by the IRS?
No. Churches that meet the requirements of Section 501c3 of the Internal Revenue Code are automatically considered tax-exempt but aren't automatically granted 501c3 status without applying.
Can donors deduct contributions to churches without 501c3 status?
Generally, no. For a donation to be tax-deductible, the church must be recognized by the IRS as a 501c3 organization. While churches that meet the requirements are automatically considered tax-exempt, they aren't automatically granted 501c3 status without an application.
Why might some churches not want 501c3 status?
Obtaining 501c3 status means adhering to specific IRS rules. Some churches may not want to be constrained by these guidelines or deal with the additional administrative paperwork.
Are all donations to churches tax-deductible?
Only donations to churches with 501c3 status are tax-deductible. It's essential to check a church's status before claiming a deduction.
How do churches obtain 501c3 status?
Churches apply through the IRS by filing Form 1023 or its shorter version, Form 1023-EZ. Once approved, they're granted tax-exempt status and can receive tax-deductible donations.
Do churches with 501c3 status have to file annual returns?
No, churches do not have to file Form 990. Churches are excluded from some of the extensive financial disclosures other nonprofits must submit. However, churches can choose to voluntarily file the form.
Can churches lose their 501c3 status?
Yes. If a church violates the guidelines set by the IRS, such as participating in political campaigns, they risk losing their tax-exempt status with the federal government.