Menu Close

Tag: 501c3

Understanding 501c3 Status for Churches

somerset baptist church 1989

I listen to a lot of atheist podcasts and watch a lot of videos. I have noticed a disturbing trend among these content creators: when it comes to church taxation, tax exemption, non-profit status, and 501c3 status, many of them don’t know what the hell they are talking about. I used to politely and privately correct these content creators. Unfortunately, not one person responded to me, thanking me for correcting their mistake, so I stopped doing so. If we are going to critique Christianity, particularly Evangelicalism and the Independent Fundamentalist Baptist (IFB) church movement, then we have a duty to so honestly and factually.

ALL churches, by default, are granted 501(c)(3) status but the Internal Revenue Service (IRS). Churches don’t have to apply for this status, nor do they have to be non-profit. If a group of people gather together in a home somewhere, have a pastor/teacher/elder, and worship their God on a regular basis, the IRS, by default considers them a church. In the mind of the IRS, if it looks like a church, it is a church. The IRS goes out of its way to NOT define what a church is. Yes, the IRS publishes criteria for what constitutes a church, but they do NOT use this list in any meaningful way when determining 501(c)(3) status. Freedom of religion is all that matters to the IRS, so if a church says it’s a church, that’s good enough for them.

501(c)(3) status allows a church exemption from federal taxation. Its donations are tax-exempt, and donors can claim their donations on their tax returns. This does not mean the church’s pastor and/or staff is exempt from federal taxation. He still has to pay federal income tax, Medicare tax, and Social Security tax. Pastors are generally considered self-employed, though the law is complex on their status. Pastors should receive a 1099 from their churches, not a W-2 (generally speaking). I will show in another post how pastors can use special provisions in the law — exemptions and deductions only available to them — to drastically reduce their taxable income. (It’s a great gig if you can get it. Just start a church and all these perks can be yours!)

In many states, churches are exempt from sales tax and real estate tax. I lived in one area where the Catholic church owned thousands of acres and numerous houses — all exempt from real estate taxes. I bought several new cars through one church I pastored, saving hundreds of dollars in sales tax. When I went to file the title for one car, the person in charge refused to do it. She told me I had to pay taxes on the purchase. I told her I didn’t. The car was owned by the church and provided to me for my use. This went on for a couple of days. Finally, her boss in Columbus informed her that she had to title the car.

Churches are not necessarily non-profit. Here in Ohio, a church must apply for non-profit status. The churches I pastored were non-profit corporations (though none of them actually followed Ohio corporate law). Incorporating allows churches to shield their officers from personal liability for malfeasance. When churches are sued, it’s the corporation that is sued, and not its officers (pastors, deacons, board members). It might be surprising for readers to learn that, in incorporated churches, it’s their constitution and bylaws that determine how a church is governed and how claims are adjudicated, not the Bible. Churches learn this the hard way when they have conflict or when they are trying to fire a pastor.

Once a church has non-profit status, it can then file for OFFICAL 501(c)(3) status. This is different from the generic 501(c)(3) status granted to all churches. Official 501(c)(3) status requires churches to file documents with the IRS, proving that they are a charity worthy of tax exemption. Once a church is approved, it receives an official letter that states it has 501(c)(3) status. Denominations apply for 501(c)(3) status, and once approved, all churches under their umbrella are, by default, granted official 501(c)(3) status. Once approved, churches have greater access to grants and programs, along with special mailing privileges with the U.S. Post Office.

Hopefully, readers will find this helpful. I am not a tax lawyer nor accountant. I do, however, have extensive experience starting new churches. It was important to me at the time to know exactly what the law said about churches. While I haven’t started a new church in a few years, I am unaware of any meaningful changes in the law that would alter what I have written here. If you have any questions, I am more than happy to answer them.

bruce-gerencser-headshot

Bruce Gerencser, 65, lives in rural Northwest Ohio with his wife of 44 years. He and his wife have six grown children and thirteen grandchildren. Bruce pastored Evangelical churches for twenty-five years in Ohio, Texas, and Michigan. Bruce left the ministry in 2005, and in 2008 he left Christianity. Bruce is now a humanist and an atheist.

Connect with me on social media:

You can email Bruce via the Contact Form.

Your comments are welcome and appreciated. All first-time comments are moderated. Please read the commenting rules before commenting.

The Johnson Amendment: I Agree With Donald Trump

501c3

In the 1950s, thanks to men such as there’s-a-red-under-every-bed Catholic Congressman Joseph McCarthy, American Christianity’s God found a home in the Pledge of Allegiance and on the back of our paper money. Under God was added to the Pledge (1954) and In God we Trust was added to American paper currency (1957). In 1957, President Dwight Eisenhower signed a bill into law that stated the national motto was In God we Trust. These blatantly unconstitutional acts are still with us today. In 1954, then-Senator Lyndon B. Johnson proposed an amendment to U.S. tax code that would forbid churches and other non-profit, tax exempt institutions (501(c)(3)) from endorsing and campaigning for political candidates. This amendment is currently part of the tax code.

Under the Internal Revenue Code, all section 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office. Contributions to political campaign funds or public statements of position (verbal or written) made on behalf of the organization in favor of or in opposition to any candidate for public office clearly violate the prohibition against political campaign activity. Violating this prohibition may result in denial or revocation of tax-exempt status and the imposition of certain taxes.

Certain activities or expenditures may not be prohibited depending on the facts and circumstances. For example, certain voter education activities (including presenting public forums and publishing voter education guides) conducted in a non-partisan manner do not constitute prohibited political campaign activity. In addition, other activities intended to encourage people to participate in the electoral process, such as voter registration and get-out-the-vote drives, would not be prohibited political campaign activity if conducted in a non-partisan manner.

On the other hand, voter education or registration activities with evidence of bias that (a) would favor one candidate over another; (b) oppose a candidate in some manner; or (c) have the effect of favoring a candidate or group of candidates, will constitute prohibited participation or intervention.

The Internal Revenue Service provides resources to exempt organizations and the public to help them understand the prohibition. As part of its examination program, the IRS also monitors whether organizations are complying with the prohibition.

Churches and their pastors KNOW that U.S. law forbids directly endorsing or campaigning for political candidates. They also know that they are free to ignore the law because the IRS has shown that it has no appetite for going after churches and pastors who spend time and money whoring for political candidates. Evangelicals, sensing that the Obama Administration will not revoke their tax exemption, now want Congress to overturn the Johnson Amendment, giving churches and pastors the right to keep their blanket tax exemption AND endorse, work for, and financially support political candidates.

In recent days, Republican Presidential Candidate Donald Trump has said that, if elected, he would work to repeal the Johnson Amendment. I agree. I hope Congress will remove this amendment from the U.S. Tax Code. I also hope they will strip from the tax code the clergy housing allowance and any/all preferences churches and religious institutions currently receive. It is time for poor, helpless churches and their pastors to be cast out into the world to live by the same rules and laws that govern other businesses. Yes, other businesses, because churches are, above all else, profit-driven businesses. The charitable, public service parts of what churches do is minuscule. Churches exist, for the most part, to serve their customers — members and prospective members. If churches wish to remain tax-exempt, then the bulk of their income should be spent on charitable works. As it stands now, churches spend most of their money on buildings, salaries, benefits, and programs that only serve congregants.

If, as Donald Trump and many Evangelicals/Catholics want, the Johnson Amendment is overturned, churches and religious institutions should then be required to file business income tax returns and govern themselves according to current business law. This means churches and religious groups should also be required to pay sales tax, real estate tax, and every other tax businesses pay. Imagine the trillions of dollars that will make its way into local, state, and federal government coffers.

Churches and pastors should be careful about what they wish for. If churches are required to play by the same rules as businesses, I suspect that there would be a lot of church bankruptcies and mergers. Good news, to be sure, for those of us who are tired of churches receiving unconstitutional favoritism and financial support via tax exemptions, tuition payments, reduced postage charges, and other tax benefits that are only available to churches and religious institutions. But, bad news for those few churches and pastors who really do care about the social welfare of others.

Notes

Churches have always been permitted to support ballot initiatives and issues.

Pastors, outside of their official capacity, are free to endorse candidates. Unfortunately, this line has become blurred, and an increasing number of pastors and parachurch leaders now think they can endorse candidates without restriction. Realizing that they are breaking the law, these so-called men of God often add to their pronouncements, I say this as an individual, not in my official capacity as a pastor. And then they smile and wink.

Churches, by the way, do not have to file for 501(c)(3) tax status. They are, by default, considered tax exempt. Churches do not have to file any documents in order to be exempt.

What is a Church According to the IRS?

irs

Anyone can start a church. In most cases, the new church will be considered tax exempt by federal, state, and local government.

The IRS lists the following generic (albeit very Christian sounding) characteristics of a church:

The term church is found, but not specifically defined, in the Internal Revenue Code. With the exception of the special rules for church audits, the use of the term church also includes conventions and associations of churches as well as integrated auxiliaries of a church.

Certain characteristics are generally attributed to churches.  These attributes of a church have been developed by the IRS and by court decisions.  They include:

  • Distinct legal existence
  • Recognized creed and form of worship
  • Definite and distinct ecclesiastical government
  • Formal code of doctrine and discipline
  • Distinct religious history
  • Membership not associated with any other church or denomination
  • Organization of ordained ministers
  • Ordained ministers selected after completing prescribed courses of study
  • Literature of its own
  • Established places of worship
  • Regular congregations
  • Regular religious services
  • Sunday schools for the religious instruction of the young
  • Schools for the preparation of its members

If a group of people generally exhibit these characteristics they are considered a Church by the IRS. State laws are different from federals laws and vary from state to state.

A Church is not required to file for 501c3 status to be tax exempt. 501c3 status does grant certain additional benefits to the church, BUT it is not required for tax exemption.

The IRS handbook for churches states:

Congress has enacted special tax laws applicable to churches, religious organizations, and ministers in recognition of their unique status in American society and of their rights guaranteed by the First Amendment of the Constitution of the United States. Churches and religious organizations are generally exempt from income tax and receive other favorable treatment under the tax law; however, certain income of a church or religious organization may be subject to tax, such as income from an unrelated business.

The IRS church handbook states:

Churches and religious organizations, like many other charitable organizations, qualify for exemption from federal income tax under IRC section 501(c)(3) and are generally eligible to receive tax-deductible contributions. To qualify for tax-exempt status, such an organization must meet the following requirements:

■ the organization must be organized and operated exclusively for religious, educational, scientific, or other charitable purposes,
■ net earnings may 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, and
■ the organization’s purposes and activities may not be illegal or violate fundamental public policy.

Churches that meet the requirements of IRC section 501c3 are automatically considered tax exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS.

Now, get out there and start a church. You can do it!

If you need ordained, check out the Universal Life Church.

Bruce, surely it is more complicated than that? I assure you, it is not. I’ve thought about starting a new sect, The Church of Bruce Almighty®. Donations would be tax-deductible and my church could buy buildings, property, cars, and other essential ministry tools and not pay tax.

Only in America…

Bruce Gerencser