This One Form Equals More Money
By Angie Joya
After everything that happened during the year, Pastor Daniel felt like the one thing his church had been able to do was put on an event to provide food and school supplies for families in need. He was so proud of his team for taking charge of meeting the needs of the community head-on during this challenging time. He sat and prayed over all the families and children that would be blessed by this event, and even the employees at the stores where they were shopping.
Then his phone ring.
He ignored it and kept praying that the team is blessed by - *RING RING* - that the team receives the blessings that... - *RING RING* that everyone be bless... - *RING RING*
He finally caved and answered.
"Yeah, this is Pastor Daniel. Slow down, slow down. What do you mean you can't use that letter?! I thought we did everything we needed to buy church supplies tax-free!"
This is an incredibly common scenario for pastors who are wanting to do good in their community. It seems logical that once you have 501(c)(3) approval from the IRS, you don't have to pay any taxes, right? Wrong.
So, what is the difference between federal tax exemption and state tax exemption? Do you even need state tax exemption? Let's explore this topic and find out how you can save your church thousands of dollars in its annual operating budget!
State vs. Federal
Before we dive in, it's important to clarify that there are two different types of exemptions.
Federal tax exemption allows an organization to be free from paying income taxes on donated funds and money.
State tax exemption, also known as sales tax exemption, is the exemption on tax collected from an individual or business for the sale of merchandise or service, enforced by the state government.
Simply put, the government functions on two planes: the state level and the federal level. Furthermore, just because you have one type of exemption does not necessarily automatically grant you the other.
Considerations when applying
Another difference between state and federal exemption is that federal tax exemption is available to all charities that use and meet specific requirements—but not all states offer state tax exemption. There are a few things to keep in mind when considering applying for state tax exemption:
1. Determine what exemption your state provides.
Currently, over 30 states offer sales tax exemption. Like California and Utah, some states provide only franchise tax exemption, whereas Texas provides a combination of the two!
2. Determine what the requirements are in your state.
Different states have different requirements. Most often, at minimum, the requirements for applying are:
- Articles of incorporation: The articles of incorporation always contain a purpose statement explaining the charitable and/or religious functions of your church or ministry. This document will help serve as proof that the organization has incorporated with the state and will define its nonprofit status.
- FEIN (Tax ID number): The Federal Employer Identification Number is obtained from the IRS and is required for banking purposes, both for businesses and nonprofit corporations. When applying for sales tax exemption, the FEIN of the church needs to match the name that appears on your articles of incorporation.
- Bylaws: The bylaws are the official set of rules, guidelines, and regulations designed to influence and govern the daily affairs of the organization and those involved with it.
- Financial information: Most states require a copy of a church's latest financial statement. This information allows the state to monitor the church's financial activity to see that its intended purpose is genuinely that of a nonprofit.
- Suppose your church is less than one year old. In that case, we recommend that you submit a financial statement covering the time from incorporation until the present, along with a projected budget for the following year. This is so that the state can see how the church intends to use the sales tax exemption.
- Federal Determination Letter: This letter is also known as an "approval letter" for 501(c)(3) status. Many states require nonprofits to obtain their 501(c)(3) status with the IRS before applying for sales tax exemption. The reason is that the states recognize that the IRS has specific requirements that nonprofits must meet before becoming federally tax-exempt. The states' requirements often mirror those of the IRS, allowing the state to rely on the IRS' determination of an organization's tax-exempt status.
If you need assistance obtaining any of these items, I encourage you to give us a call at StartCHURCH! We will help you establish a solid legal foundation for your church or ministry. With our StartRIGHT Service, the process of ensuring your organization is legally compliant has never been easier! Our team of church planting specialists will make sure you have everything in place to protect what God has given you to lead. Give us a call today at 877-494-4655!
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3. Determine if you're ready to apply for sales tax exemption.
As previously discussed, different states have different filing requirements. Some states, such as Illinois, require that a church meet in a public facility and not in a home to be able to apply. In contrast, Virginia requires that the church's administrative expenses not be more than 40% of their total income when they apply.
Though you may feel ready, the state filing requirements may require you to meet certain specifications that you are not yet prepared to meet.
4. Determine what the necessary forms are with the state.
The states that offer sales or franchise tax exemption have a form that can range from one page to 20 pages. To find out more about your specific state, give us a call, 877-494-4655!
Put Cash Back in Your Pocket
By obtaining state sales tax exemption, you add an average of 7% to your yearly budget. I always encourage pastors and leaders of churches and ministries to apply for sales tax exemption to help them make the most of their finances. Imagine what you could do with your annual operating budget if you file this one form and save your church or ministry thousands of dollars!
Whether you're unsure if you qualify, you're uncertain of the requirements, or you're not even sure if your state offers this benefit, StartCHURCH is here to help. For more information on sales tax exemption provided in your state, or any other exemptions that could be saving your church or ministry hundreds or thousands of dollars, contact one of our church planting specialists at 877-494-4655 or click the link below to schedule a call!