The Internal Revenue Code section 508(c) sets out that churches are automatically recognized as tax-exempt under 501(c)(3), and the IRS does not require churches to apply for tax-exempt status if they meet the following criteria:
- 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;
- an organization of ordained ministers;
- ordained ministers selected after completing prescribed studies;
- a literature of its own;
- established places of worship;
- regular congregations;
- regular religious services;
- Sunday schools for religious instruction of the young; and
- schools for the preparation of its ministers.
Additionally, some churches with a parent organization may be tax-exempt if the parent organization has a group ruling and it includes the specific church on its list of affiliated organizations.
Churches are not technically required to file Form 1023 to be considered a tax-exempt organization. However, by filing Form 1023, churches can obtain a Determination Letter from the IRS that is considered proof that the church is a 501(c)(3) tax-exempt organization. Without a Determination Letter, the church and its donors risk that the IRS could later determine that the church did not qualify as a tax-exempt organization.
There are several reasons why many churches apply for tax-exemption.
- Having 501(c)(3) status allows churches the ability to guarantee that tithes, offerings, and donations are tax-deductible to donors because there is written proof from the IRS that the church is a registered charity.
- Many states do not automatically guarantee sales tax exemption without a 501(c)(3) letter from the IRS.
- Bulk mailing rates and most grants will not be extended to your church or ministry without 501(c)(3) status.
Generally speaking, there are three steps to gaining 501(c)(3) exemption status:
- Obtain an Employer Identification Number (EIN): You can request an EIN from the IRS by filing Form SS-4 (PDF). (An organization will need an EIN whether or not they have employees.)
- File the IRS Form 1023 (PDF): Submit this and a filing fee (amount determined by the average yearly gross receipts).
- Receive IRS approval: Your church will be issued a determination letter that says the IRS recognizes your church as having exempt status.
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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