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Does a Church Need to be 501(c)(3) Approved?

By Raul Rivera

Every so often, I get the question, “If we are a church, why do we need to apply for 501(c)(3) status?” 

This is not a totally uncommon question. Over 10 million search results appear when you Google, “Do churches need to apply for 501(c)(3) status?” It seems many pastors and church leaders are asking the same question. The problem that many pastors run into is sifting through all of the information available online. 

The amount of misinformation surrounding 501(c)(3) exemption for churches seems to always take me by surprise. (I suppose by now, though, it should not.)

While churches are considered tax-exempt without officially applying for 501(c)(3) status, the implications of not obtaining 501(c)(3) approval are often misunderstood and can be costly. 

The problem is that there is this disconnect . . . this knowledge gap, so to speak, among pastors and the truth of what it means to apply for 501(c)(3) tax exemption.

It is time to clear the air. 

The myth of “a church outside of the 501(c)(3) law”

We often speak with pastors who have received information from other pastor friends or illegitimate online articles without checking the sources. One of the most common misconceptions we hear is, “I am a 508 church.” Many believe this to be a church outside of the law. 

Yet, the fact of the matter is that there is no such thing as a “508 church.”

Yes, section 508(c)(1)(A) does relieve churches of the obligation to apply for 501(c)(3) tax-exempt status. 

However, there is no provision under the law that allows an organization, church or otherwise, to receive tax-exempt donations without meeting the requirements under section 501(c)(3).

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“What happens if my church does not apply for 501(c)(3)?”

Applying for 501(c)(3) status is optional for churches, but to not do so can prove to be costly. 

We see in court cases, such as Jack Lane Taylor v. Commissioner, the burden that is placed on donors of churches without 501(c)(3) status. If a donor is audited, he or she must establish or prove that the church meets the requirements and qualifications of a section 501(c)(3) organization.

What a burden for an individual to carry!

For this reason, many donors may choose not to donate to organizations without a 501(c)(3) approval.

In addition, the presumption of tax-exempt status does not exist unless the church has been officially recognized by the IRS to meet the requirements of section 501(c)(3). 

Applying for 501(c)(3) status is optional for churches, but to not do so can prove to be costly.

Churches that have never applied for 501(c)(3) status have not proven they are compliant with the law. If a church is ever caught functioning outside of the law, the revocation of its tax exemption will likely go back to the inception date of the church.

(Recommended reading: "How to Start a Church the Right Way")

In the case of Brach Ministries v. Rossotti, Branch Ministries, a church applied for and obtained 501(c)(3) exemption. The church was later found guilty of intervening in a political campaign, and its tax-exempt status was revoked.

In this instance, the revocation went back to the beginning of the tax year where it was found to be out of compliance. Had the church not applied for 501(c)(3) exemption, it would have likely been deemed a non tax-exempt organization from the beginning of its existence.

Do you meet the criteria for church status? 

Obtaining 501(c)(3) status is one of the most protective steps a church can take, not only for itself, but also for its donors. For this reason, our StartRIGHT Service takes churches through both processes of incorporation and 501(c)(3) approval. 

Some churches come to us years after their first service and already have hundreds of attendees. Other churches we work with are still in the planning phases or have just begun meeting in a home with a handful of congregants.

No matter how big or small the church is, the IRS uses the same standards and criteria when determining whether or not an organization is a church for tax purposes. 

There is no official definition of “church” in the tax code. When the IRS examines a 501(c)(3) application for church status, it uses a set of criteria known as the 14/15 Point Test.

Obtaining 501(c)(3)status is one of the most protective steps a church can take for itself and its donors.

This “test” provides basic guidelines to help the IRS and courts determine which organizations can be classified as a church for tax purposes. Some of the points are weighted more heavily than others. These points include:

  1. A distinct legal existence - Does your church have its own incorporation and Federal Employer Identification Number (FEIN)?
  2. A definite and distinct ecclesiastical government - Does your church have its own pastor, minister, or ecclesiastical board?
  3. A formal code of doctrine and discipline - Does your church have a set of doctrines and beliefs that your congregants are expected to follow?
  4. Established places of worship - Do your worship services take place in a stable location, preferably a public facility instead of one’s home?
  5. Regular congregations - Do your worship services contain more than 20 people? Are multiple families represented?
  6. Regular religious services - Does your church have regularly scheduled worship services? 

Now, there is no set number of “points” that must be met. However, the more points you are able to meet of the 14/15 Point Test, the better chances you have of your organization being classified as a church for federal income tax purposes.

3 benefits of incorporating your church now

Perhaps you are only in the beginning stages of starting your church, or maybe you have not held any official meetings or gatherings, and the idea of taking any official legal steps has yet to cross your mind.

You are thinking to yourself, “We will get incorporated once our church is more established.”

To that, I want to give you some benefits of being proactive and establishing your church corporation sooner rather than later.

Benefit #1: Forming a corporation at the state level establishes a corporate veil that separates the actions of the corporation from the actions of you and your church members. Without the corporate veil, members’ personal assets may be at risk in the instance of a lawsuit.

Benefit #2: Once incorporated, your church can adopt important governing documents like bylaws, written doctrines, and policies. Likewise, your church’s governing body can legally ordain ministers and begin functioning in an ecclesiastical manner.

Benefit #3: Once incorporated, you will be able to open a bank account in the church’s name. This important step will allow you to properly deposit donations and monitor income and expenses of your church. Keep in mind that most banks will ask for both the approved articles of incorporation and the FEIN. That number, also known as a Tax ID Number, can be obtained online from the IRS.

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Why not start your church or ministry the right way?

A good foundation is essential for a church to be lasting and impactful within its community. As every pastor knows, starting a church is a marathon, not a sprint.

Our goal at StartCHURCH is to help you establish a solid legal foundation for your church or ministry to build upon. Keep in mind that it is important you take time to consider all options when establishing your church’s legal foundation.

Pace yourself to run the race that God has set before you, for he will give you the strength and resources you need to succeed.

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