501c3 Tax Exemption for Church
So you would like to start a 501c3 organization and submit a tax exempt form, but are unsure whether you are a church or a religious organization?
Before providing clarity regarding church tax exemption process, we must first evaluate and define all relevant and important terms. The terms “church” and “religious” are both used in IRS 501c3 but neither word is specifically defined. The term “church” is also used generically to define all houses of worship, including mosques and synagogues, regardless of religion. In order to be recognized by the IRS as a church, organizations must complete Schedule A of the 1023 application. The IRS uses the Schedule A to determine if the applicant organization is a bona fide church, based on specific criteria. The IRS’s church criteria are not a religious test, but rather a test for the purposes of tax law. For organizations that only wish to be recognized as a religious organization only the basic 1023 application is needed. Now having assessed the key terms of church tax exemption, let us discuss the benefits of submitting a tax exempt form.
Tax exemption can be a positive move for churches and outreach ministries. The benefit of being recognized by the IRS as a church is that you will not be required to file the annual 990, which all other nonprofit organizations must submit each year. Nonetheless, many churches choose to file this return voluntarily in the interest of transparency. Being recognized as a 501c3 organization will also allow contributions to be tax deductable for the donors. Another benefit churches have over other exempt organizations would be that they are not required to withhold Social Security and Medicare taxes from the compensation that it pays to its duly ordained, commissioned or licensed religious leaders for performing services in the exercise of their ministry. The taxable income of the religious leader also does not include the fair rental value of a home provided, or a housing allowance paid, as part of the minister’s compensation for duties preformed that are ordinarily the duties of a minister. Now, before a religious leader decides to go in-depth regarding the 501c3 and have tax exemptions explained in detail, the organization has to determine its classification per the IRS.
In order for the IRS to recognize an organization as a church, they must be able to demonstrate that they meet a preponderance of the points of the IRS’ “14 Point church Test,” which include:
- A Distinct Legal Existence
- A Recognized Creed and Form of Worship
- A Definite and Distinct Ecclesiastical Government
- A formal code of Doctrine and Discipline
- A Distinct Religious History
- A Membership Not Associated with any (other) Church or Denomination
- A Complete Organization of Ordained Ministers Ministering to their Congregations
- Ordained Ministers Elected After Completing Prescribed Courses of Study
- Literature of its Own
- An Established Places of Worship
- Regular Religious Services
- Sunday Schools for Religious Instruction of the Young
- Schools for the Preparation of Its Ministers
- Regular Congregations
There are no specific requirements as to what constitutes an established congregation but it should be made up of at least a minimum 25 members and not all member should be a part of the same family. In addition to successfully providing this information organizations may also be asked by the IRS to produce photographic evidence. These photographs should be an outside picture of the facility, any outside signage that shows its availability and invites the public to attend and a picture of the congregation during worship. Other information the IRS may request to help determine if an organization is an actual church rather than a religions organization is a list of the congregation’s members. This list will need to include the names, addresses and telephone numbers of all the individuals who are members of the church. It may also be beneficial to provide any additional printed materials that the church circulates such as newsletters, bulletins, or programs used during service.
For any organization applying for 501c3 tax exemption status the process can be intimidating and overwhelming. The religious tax exemption process can be even more frightening for organizations applying as churches. This is in part due to the additional questions and documentation that is necessary to complete Schedule A, which is necessary for the IRS to classify an organization as church. Remember that with the right preparation and guidance – such as with ChurchNet USA – there is no one more qualified and better prepared to answer these questions about your organization than you. When preparing and submitting your application for tax exempt status you should carefully and accurately answer all the questions and gather all the necessary supporting documents. With the proper information on hand this process should not be excessively difficult for organizations that are truly churches. For those organizations that have difficulties completing this application, they may need to reconsider if they truly are a church in the eyes of the IRS.