Tax season is upon us as individual taxpayers. But when it comes to churches as organizations, do they pay taxes?
Like so many things in life, the answer to this question is rather complex. In fact, the real answer to this question is: “Yes, and no.” While it is true that churches, merely by the virtue of truly being churches, enjoy tax-exempt status from federal corporate taxes, that does not mean that churches do not pay taxes at all.
First of all, the answer is “no, churches do not pay taxes.” Churches do enjoy tax-exempt status with the Internal Revenue Service. What this means is that churches do not pay corporate taxes like other types of corporate entities often do. There is no requirement to file an annual tax return to perform a calculation of how much corporate tax is owed. Further, churches are usually not required to file a non-profit organization information return.
The IRS deems a church to automatically have tax-exempt status. The church is not required to file an application for tax-exempt status or obtain a confirmation letter in order qualify for this status as long the church is truly operating as a “church,” as that term is understood by the IRS. Courts and the IRS have been hesitant to develop a rigid definition of the term “church.” However, it is clear that to qualify as a church an organization must, at minimum, consist of a group of believers who assemble on a regular basis for worship, and their activities must be reasonably available to the public. Other factors include whether there are church members, an ordained minister, and an established place of worship, among others.
Even though it is not required, many churches chose to file the federal Form 1023 seeking a confirmation letter of their tax-exempt status. There are many reasons to have this letter, both in order to satisfy the requirements of some donors, and in order to qualify for certain state and local benefits.
Second, the answer is “yes, churches do pay some kinds of taxes.” The most common taxes that churches pay are payroll taxes for their employees. Churches must withhold and file taxes for their employees, though ministers do qualify for some special treatment (which was covered in another recent blog post).
Churches can also be subject to taxation on unrelated business income for money received that is not strictly related to nonprofit purposes.
Churches are subject to pay sales tax if they have not obtained sales tax exemption from their state. Further, churches may be required to collect and file sales tax on items sold by the church, unless those items qualify for exemption.
Churches may be subject to pay property tax if they have not obtained property tax exemption for their facilities from their state or local municipality. In some states, churches are also subject to taxes for the personal, non-real estate property they own, unless they have qualified for exemption.
Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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