Church & Non-Profit Explained (Part 4)

IRS Determination Letter (Form 1023)

If a church decides to apply for and obtain recognition of tax-exempt status, then it must complete Form 1023 with the IRS. Upon approval, the IRS will send a Determination Letter to the applicant. It is also referred to as a 501(c)(3) Exemption Ruling Letter or simply your tax letter. At this point, churches and other non-profit organizations are often referred to as qualified charities and/or qualified 501(c)(3)’s. This is a bit of a misnomer because as mentioned, churches (that meet certain requirements) automatically qualify as tax-exempt charities. Nevertheless, the only recognition from the IRS of non-profit standing comes from the Determination Letter provided by the IRS, after which Form 1023 has been approved. Upon receiving this letter from the IRS, it is important to keep this letter in a safe place with other important church documents.

On the other hand, all non-church organizations seeking tax-exempt status must complete Form 1023 from the IRS. Once Form 1023 has been approved, non-church organizations then qualify as tax-exempt charitable organizations. The fact that all non-church organizations must apply for an Exemption letter leads many people to conclude that all churches must apply and receive the same Exemption letter as well. This is simply not true. Furthermore, all non-church charitable organizations must also file an annual Form 990, which includes the disclosure of detailed financial statements, including Officer compensation. Form 990, in its entirety, is listed in IRS Publication 78, which is publicly accessible on the web at GuideStar.org.

Churches that have completed Form 1023 are NOT required to complete an annual Form 990 return. Many churches file Form 990, even though they do not have to. We recommend that if you submit Form 1023 to the IRS, then be sure not to submit Form 990. As mentioned, Form 990 becomes public information and we believe the financial operations of the church and officer salaries should remain private. If you are ever challenged by a government or other organization to file Form 990, then refer them to IRC 6033(a)(3)(A)(i) and Reg. 1.6033-2(g)(1)(i) which expressly exempts churches from filing Form 990 and continues to apply even if the church files a Form 1023.

Finally, Form 1023 is similar to Form 990 in that it also requests officer compensation amounts and this information is also made “public”. However, this information is not nearly as accessible as Form 990. One must file Form 4506(A) with the IRS and the IRS will send you the completed Form 1023.

Many churches are filing Form 1023 out of necessity as the Determination Letter is needed in the following ways:

  • In order to receive a non-profit bulk mailing discount, the post office requires either a Determination Letter or audited financial statements.
  • State governments often request a Determination Letter in order to grant their own tax exemptions (such as sales tax exemptions).
  • Brokerage firms often request a Determination Letter in order to set up 403(b) retirement plans, which are specifically for tax-exempt organizations.
  • A large donor (particularly a corporate donor) may request a Determination Letter as a prerequisite to making a financial gift.
  • Some tenants, particularly public facilities, often require a Determination Letter in their leases.

Sanford
North Point Community Church

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    Don’t forget…you also need to file Form 941 if you have church employees! Ministers as well as other individuals earning a very small amount for their work in the church are exempt from FICA, but 941 is still needed to report the Federal Income Taxes withheld.

    Some additional elaboration from PS20 would be beneficial I think!

    Andrew

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