Last Chance for Churches To Do This Before 2017

By Raul Rivera

Sarah Mayfield was dismayed to receive an audit letter for her 2015 tax return. She was even more alarmed that her church donations were among the items in question. When her church launched in January 2015, it had a clearly defined plan of obtaining a 501(c)(3) status, which is why Sarah had felt certain that her tithes and offerings to the church would be tax deductible.

But after a meeting with the church secretary, Sarah quickly learned why some of her donations were being questioned by the IRS.

In the fall of 2014, the organizers had been planning for a January 2015 official launch date, part of the preparation for which was to begin the 501(c)(3) legal process. The church leaders had every intention of becoming incorporated prior to the launch, but as is often the case, the priority of this matter began losing importance as the launch date neared.

The church successfully launched, and it was halfway through February before the leaders recalled something important: they had let the priority of getting incorporated slip away. Immediately, they started the incorporation process again and made it a top priority.

In mid-April the church received the state approved articles of incorporation, and it was able to move forward with the 501(c)(3) application. All seemed to be going ok, but the church leaders did not realize at that time how this delayed priority would affect members like Sarah. 

An interesting predicament

Although the story above is fictional, it is not an uncommon one. The story raises an important aspect of nonprofit tax law, from a different viewpoint. How does a ministry, or any type of public charity, best protect the donations it receives in the early stages? The immediate answer is, “Apply for 501(c)(3) status as soon as possible.”

(Recommended reading: "Does a Church Need to be 501(c)(3) Approved?")

It is important to know that there are required steps prior to the actual filing of a 501(c)(3) application. These steps will help protect and guarantee the deductibility of the tithes and offerings that are given to your church. This is a huge relief to many donors.

Next, we will address the first steps that you should begin taking today, if you have not done so already.

Benefits of forming a corporation before the end of 2016

Each year we have the honor of working with hundreds of new church plants and ministries. My heart is glad to know that these leaders care about establishing a solid legal foundation to better protect what God has given them to lead, as well as the individuals they will be serving. One of the ways to accomplish this goal is through forming a corporation.

There are multiple benefits to establishing a corporation before the end of the year, especially if you are preparing to launch your church or ministry in 2017.

Below we will review two benefits that apply to both churches and ministries:

Benefit #1: Ensures the tax deductibility of donations to your church. 

When the IRS approves a 1023 application, it grants the approval retroactive to the date of incorporation for all churches. For a non-church entity, the IRS grants this retroactive approval if that charity applies within 27 months of incorporation.

As in Sarah’s case above, the tax deductibility of donations given prior to a formed corporation is based on facts and circumstances. It should not be assumed that a donation will be counted as deductible because the organization “did things right” prior to forming. Thankfully, Sarah was able to provide the IRS with enough compelling evidence that proved the donations in question were indeed given to a church organization.

Benefit #2: Creates a corporate veil of protection to substantially limit the liability for board members, church members, or participants in your organization.

When a church is incorporated, a legal entity (corporation) is created separate and distinct from the members of the organization. A corporate veil is the legal concept that involves liability protection. Under the corporate veil, if court action was taken against a corporation, the personal assets of the members would be protected.

If no corporate veil exists, the members of the organization (including board members, church members, and ministry partners) are all held liable for lawsuits against the organization.

How to form a corporation

Forming a corporation may seem simple; however, there are important steps that you should follow. First, the articles of incorporation must be drafted. Depending on your state, this document is called articles of organization, certificate of formation, or certificate of incorporation. Within this document there is certain needed language included in order to ensure that (for tax purposes) your corporation is properly formed as a church.

There are benefits to establishing a corporation before the end of the year, especially if you are preparing to launch your church in 2017.

Your articles of incorporation should include the following:

1. A proper purpose statement. 

Your purpose statement is not the same as your mission or vision statement, and it should not be a detailed list of every activity your church will perform. Those are good things to have in place and documented, but they are not necessary for the articles of incorporation. Rather, the purpose statement is intended to be a “big picture” outlook of why your church exists. 

Ordination language is one item that many churches unintentionally omit from the purpose statement. If your church intends to ordain ministers of the gospel, then the ordination language must be included in your church’s purpose statement. In essence, your purpose statement should be written in a way that clearly indicates to the IRS that your church is organized and operated exclusively for religious and charitable purposes.  

2. Statements explaining the charitable use of your assets. 

How your church uses its assets matters. In fact, it is prohibited for any person to directly benefit from the church because of his or her position. Therefore, your church’s articles of incorporation must include a dissolution clause. In essence, the dissolution clause states that if your church was to close its doors for any reason, then all of the cash and assets will be distributed to another 501(c)(3) organization(s).

The assets or additional cash that your church has at that time cannot remain with you, or anyone else, as a “gift” or type of severance package. In fact, when you file your application for recognition as a 501(c)(3) organization, the IRS will specify where your dissolution clause is located in your articles of incorporation.

More to know

Forming a corporation in 2016 will position you for great success while preparing for the launch of your church or ministry in 2017. The requirements for creating a corporation vary from state to state. In addition to federal requirements, each state has requirements for how the articles should be presented, fees to form the corporation, and reporting requirements to maintain corporation status in the state.

I realize that this can be a lot to process, so I want to provide you with three action steps to do today:

• Click here to learn more about how our StartRIGHT® Program can help you and your church throughout the entire process of establishing your church’s legal foundation.
• If you are ambitious and confident that this is something you can tackle yourself with a little guidance, click here to read more about our Launch Suite.
• Lastly, if you have questions, then give us a call at 877-494-4655, and one of our knowledgable staff members will be pleased to serve you!

Handpicked articles for you:

• “Does a Church Need to be 501(c)(3) Approved?”
• “Tither Denied Deduction Because Church was not 501(c)(3)”
• “Approved by IRS, Revoked by State”

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