Church & Non-Profit explained (Part 1)

Over the next few posts, we will be discussing some common questions regarding church and non-profit taxes. This should serve as a guide in understanding tax terminology and making sense of the IRS, Federal tax, State Tax, Incorporation, etc.

Terminology: “Non-Profit” / “Tax-Exempt” / “501(c)(3)” / Etc.

“Non-profit”, “tax-exempt”, “501(c)(3)” and “charitable organization” are often used interchangeably. However, on occasion, it may be helpful to understand the subtle differences.

The non-profit organization concept is a state law creation. Once the Articles of Incorporation have been accepted by the state, the state will recognize the church as a non-profit organization.

The tax-exempt organization concept is the common terminology with respect to federal law.

Under IRS Section 501(c)(3), organizations are exempt from the tax law as long as they meet the criteria defining a church or Non-Profit. An organization must “substantially” meet fourteen characteristics to be tax-exempt, such as:

  • Organized and operated exclusively for religious purposes.
  • Net earnings must not inure to the benefit of any private individual or shareholder.
  • No substantial part of its activity may be attempting to influence legislation.
  • The organization may not intervene in political campaigns.
  • A recognized creed and form of worship.
  • Regular religious services, places of worship and congregations.

Organizations described in section 501(c)(3) are commonly referred to as “charitable organizations“. A 501(c)(3) is not something that a church must apply for, “get” or “have”. Rather, 501(c)(3) is how a church must be organized and operational in order to be considered a federally tax-exempt organization. Churches that meet the above-mentioned IRS 501(c)(3) requirements are not required to apply for and obtain recognition of tax-exempt status from the IRS, an issue that is further discussed in the next section.

Therefore, churches are tax-exempt organizations as long as they meet both the organizational and the operational test found in 501(c)(3). Keep in mind that churches must be “organized and operated exclusively for religious purposes” and this “purpose” must be stated in the church’s Articles of Incorporation.

Sanford
North Point Community Church

5 Comments

  1. Anonymous
    Posted April 11, 2008 at 3:09 pm | Permalink

    can a church be recognized by the IRS as tax-exempt without incorporation?

  2. Ben Habeck
    Posted April 11, 2008 at 3:10 pm | Permalink

    Hey Anonymous!
    This is a great question and is somewhat gray.

    Here is our opinion…

    Churches that meet the requirements for the IRC section 501(c)(3) are automatically considered tax exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS.

    Although there is no requirement to do so, many churches seek recognition of tax-exempt status from the IRS because such recognition assures church leaders, members, and contributors that the church is recognized as exempt and qualifies for related tax benefits. For example, contributors to a church that has been recognized as tax exempt would know that their contributions generally are tax-deductible. Again, churches are not required to file Form 1023. If they decide to file Form 1023, they are not required to file Form 990. In fact, we don’t necessarily recommend filing either.

    So, every tax-exempt organization, including a church, “should” have an employer identification number (EIN), whether or not the organization has any employees. There are many instances in which an EIN is necessary. For example, a church needs an EIN when it opens a bank account, in order to be listed as a subordinate in a group filing, or if it files returns with the IRS (e.g., Forms W-2, 1099, 990-T, etc.).

    I hope this helps answer your question. Please, feel free to contact us should you have ANY further questions.

  3. Melanye
    Posted March 5, 2009 at 5:37 pm | Permalink

    My church sells monthly parking for surrounding businesses that do not have adequate parking at their facility AND sell parking to staff and students or a “well-known” university that happens to be across the street. Can that jeopardize our non-profit status?

  4. Andrew
    Posted June 12, 2009 at 11:39 am | Permalink

    Hi Melayne,

    I don’t see anyone else answering your question so I’ll take a stab at it. If you look above at the original post and refer to the second bullet, it says:

    “Net earnings must not inure to the benefit of any private individual or shareholder. ”

    This really hits at the heart of what it means to be a “non-profit.” Basically, non-profit organizations are allowed to make money. However, they do not distribute earnings to owners/shareholders/partners/etc. This is the essence of being not-for-profit. The earnings basically sit in the non-profit’s hands are are subsequently used for whatever needs arise rather than being of any kind of individual benefit to a person or shareholder.

    Make sense?

    Andrew

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