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SHOULD A CHRISTIAN CHURCH SEEK OFFICIAL I.R.S. 501(c)(3) 
TAX EXEMPT STATUS RECOGNITION?

Regarding the issue of nonprofit status, Christian Churches must grapple over a number of issues.

Incorporation: 

First, ought a church remain or seek to be a nonprofit corporation?  Alternatively, should a church remain or convert to an unincorporated association (or a corporation sole or charitable trust)?

Independence:

Second, should a Christian church remain or become an independent, nondenominational church?  Alternatively, ought a church join or affiliate under another denomination or other tax exempt organization?

IRS Tax Exempt Status:

Third, should a church elect to seek official IRS recognition as a 501(c)(3) organization?  Alternatively, might a Christian church decide to simply utilize the automatic exception without seeking formal IRS recognition (after taking into consideration the benefits or risks of such course of action)?

This article only addresses the third issue of whether or not to seek official Internal Revenue Service 501(c)(3) recognition.

OFFICIAL VERSUS AUTOMATIC TAX EXEMPT STATUS

According to IRS Publication 1828 (Tax Guide for Churches and Religious Organizations), “churches that meet the requirements of IRC Section 501(c)(3) are automatically considered exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS.” 

However, “[a]lthough there is no requirement to do so, many churches seek recognition of 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.”

Further, if a church wrongly assumed it was a “church,” and the IRS determines otherwise, then the IRS could take the position that: (1) Donations made to the entity were and are not tax deductible to the donors and are subject to income tax, (2) The entity does not qualify for special mailing rates, and (3) The organization is not exempt from unemployment insurance; and (4) The entity is generally subject to ERISA related to employee benefit plans.  See related article entitled, “What is a Church?

Several other IRS publications state that churches are automatically tax-exempt, even without seeking official IRS recognized 501(c)(3) status, including:

Package 1023, Application for Recognition of Exemption.  This document identifies “churches,” and “[i]ntegrated auxiliaries of churches, and conventions or associations of churches” as not being required to file Form 1023 (Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code).

“Organizations, including churches and religious organizations, that wish to be recognized as tax-exempt under IRC Section 501(c)(3) must use IRS Form 1023.”

On the one hand, when a Christian church incorporates and applies for 501(c)(3) status, critics say that it invites government scrutiny into church finances, activities, and membership. Moreover, some feel incorporation and seeking official tax exemption has the effect of subordinating the headship of Christ below the State who, in exchange for money (tax exemption) and other benefits, tells the church that it can’t support a political candidate, even a godly one.

On the other hand, perhaps the greatest benefit that being an officially recognized 501(c)(3) organization is the extra assurance to all donors that their tithes, offerings, and gifts are fully tax deductible.

Further, under California law, a religious nonprofit corporation is not automatically exempt from California state taxes, but it must first file a California Form 3500 which is an involved, time consuming form to prepare.   However, if the corporation first obtains formal IRS 501(c)(3) recognition status, then California Form 3500A can be utilized which is a simple and short form to prepare. 

My general recommendation is that a California Christian church corporation formally apply for 501(c)(3) recognition.

If a church joins or affiliates under another denomination or other tax exempt organization, then such church may be able proceed along a relatively simple “subordination” course, so as to come under a parent organizations IRS tax exempt recognition blanket.

In summary, there are potential and/or actual spiritual, practical and/or legal implications of how a Christian church seeks to handle its tax exempt status.  Accordingly, a church and its members need to pray about and investigate these matters fully before making a final decision as to how to proceed.

Please feel free to contact my office for a free initial consultation.

 Copyright 2007. 2008
All rights reserved.

Disclaimer: This author of this article is not rendering legal, accounting or other professional advice or service.  Professional advice on specific issues ought to be sought from a retained accountant, lawyer, or other professional.

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