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02 Aug 2016

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

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?”

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

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

The problem is that there’s this disconnect . . . this “knowledge gap” so to say . . . amongst pastors and the truth of what it means to apply for 501(c)(3) tax exemption.

It’s time to clear the air.

The myth of “a church outside of the law”

I often speak with pastors who have received information from other pastor friends or illegitimate online articles without checking the source. One of the most common misconceptions I hear is, “I’m a 508 church.”

Many believe this to be a church outside of the law. But the fact of the matter is that there is no such thing as a “508 church”.

Now yes, section 508(c)(1)(A) does relieve churches of the obligation to file for 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).

Discover How To Become 501(c)(3) Approved

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“So, what happens if my church does not apply?”

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 in fact 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 the 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 never proven it is compliant with the law. If it's ever caught functioning outside of the law, its revocation will likely go back to the inception 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 only went back to 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® Program takes churches through both processes of incorporation and 501(c)(3) approval.

Some churches come to us years after its 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.

Yet, 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. But when the IRS examines a 501(c)(3) application for church status, it uses a set of criteria known the 14/15 Point Test.

Obtaining 501(c)(3) status is one of the most protective steps a church can 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:

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

Now, there is no set number of “points” that must be met. Rather, 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 establishing your corporation now

Perhaps you’re only in the beginning stages of your church plant, or maybe you’ve yet to hold any official meetings or gatherings and the idea of taking any official legal steps has yet to cross your mind.

You’re thinking to yourself, “We’ll get to that once we are 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 the corporation at the state level establishes the corporate veil that separates the actions of the corporation from that of you and your church members on a personal level. 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.

Strengthen Your Bylaws Today!

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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 most banks will ask for both the approved articles of incorporation and the Federal Employer Identification Number (FEIN). That number, also known as a Tax ID Number, can be obtained online from the IRS.

3 options for churches when applying for 501(c)(3) status

Many newly-established and pre-launch churches may find it challenging to meet the criteria of the 14/15 Point Test. Don’t let that discourage you from moving forward!

Let’s look at 3 options for churches who doesn't quite meet the criteria:

Option 1: Apply for 501(c)(3) status and work to meet the major points of the 14/15 point test as soon as possible.

If your church does not yet meet the above criteria, but you believe it will within the next 1 to 3 months, then you may go ahead and apply for your church’s 501(c)(3) status. During the months that it takes the IRS to process your application, work towards meeting as many of the points mentioned in the 14/15 Point Test as you can.

The more progress you make, such as increased attendance or moving from meeting in one's home to a public meeting space, the better.

Option 2: Wait to Apply.

If your church has not yet begun holding religious meetings or services and will not begin within the next four months, then you may want to consider waiting to apply for 501(c)(3) status.

Whether or not a church is yet holding worship services is a huge factor the IRS considers when reviewing an application for church status.

While you are waiting to apply it is important that your church be proactive in taking the necessary steps, such as:

  • Incorporating the church;
  • Obtaining an FEIN for the church; and
  • Working to meet as many of the 14/15 points.

The risk with this option is that many pastors who wait end up never applying because they are so busy once the church is running full steam ahead.

Option 3: Apply now, reclassify later.

Some ministries have a more long-term church planting goal.

They may chose to begin with informal Bible studies and community outreach events before transitioning into regular worship services open to the general public.

If this is you, you are still in a good place to apply for 501(c)(3) status.

If you do not meet the requirements for church status, you may still apply for regular charitable status. The only difference is that the organization will be required to file annual Form 990. In this case your organization must apply within 27 months of incorporation. Once the church meets the criteria of the 14/15 Point Test, you can reclassify your tax-exempt status to that of a church.

(Recommended reading: “Should You Change Your Tax Exempt Status?”)

Running the race set before you

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.

Learn More About the StartRIGHT Program

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Please feel free to comment. We always appreciate good dialogue. However, we do moderate each comment to ensure that it is on topic and not derogatory to other participants. We ask that you keep your comments brief and pertinent to the topic so that others may benefit.

Raul Rivera

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About the Author

Church Planter. Speaker. Author. CEO. Raul Rivera has had ample experience in the church planting world. His current venture, StartCHURCH, has helped 1000's of churches to start right. Raul has compiled an array of manuals and software tools that help churches stay compliant with the IRS. He also hosts over 35 national conferences per year, training pastors on how to launch their churches. Raul is married to his wife Genel, and they and their five children live in Atlanta, GA.