31 Jan 2016

Tither Denied Deduction Because Church was not 501(c)(3)

Raul Rivera

When Mr. Taylor was informed that his tax deductions were denied, he was surprised, having been told by his counsel that a church did not have to have 501(c)(3) status in order for him to get a write-off. He had given $8,647.00 to his church only to discover that these donations were not tax-deductible. Yet, he felt the IRS was wrong to deny his deductions since he had given them to a church, even if the church did not have official 501(c)(3) status.

In his argument to the court, he stated that section 508(c)(1)(A) declares that churches are automatically exempt and that they do not have to comply with all of the requirements of section 501(c)(3). Therefore, he should be able to give to his church and still get a tax deduction. The court disagreed.

What it means for churches

The entire basis of Mr. Taylor's argument was that a church was automatically exempt and therefore not required to meet the requirements of section 501(c)(3). This is an argument that has circulated the Internet and has wrought terrible repercussions. In this case, court made it clear that in order for a person to get a tax deduction for his or her giving to a church, the organization must meet the requirements of section 501(c)(3).

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Furthermore, the court maintained that nothing in the law  ". . . relieves a church from having to meet the requirements of section 501(c)(3)." It also declared that " . . . contributors must prove the church's right to an exemption under section 501(c)(3) in order to be entitled to a deduction for their contributions." Because Mr. Taylor was not able to prove that his church had 501(c)(3) status (JACK LANE TAYLOR, v. COMMISSIONER OF INTERNAL REVENUE), his donations were not tax-deductible.

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

Burden of proof

A similar conclusion occurred in another case.

Branch Ministries, which operated as The Church at Pierce Creek sued the IRS because they lost their 501(c)(3) status due to non-compliance issues. They were concerned that their givers' tithes and offerings would not be tax-deductible. The tax court concluded that when a church receives official 501(c)(3) status, there is a presumption that "one who contributes to the organization can deduct the amount of the contribution from his or her taxable income . . ." and if the IRS audits that person's tax return, his or her donations shall be tax-deductible.

However, the court also said that a person who contributes to a church that does not have 501(c)(3) status " . . . may deduct that contribution from his or her income, but if the contributor is audited, he or she has the burden of establishing that the church in fact meets the qualifications of a section 501(c)(3) organization . . ." in order to get a tax deduction.

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

Imagine having to prove you deserve the deduction

Under current settled law, a church that does not have 501(c)(3) status is allowed to receive tithes and offerings and give tax-deductible contribution receipts to its donors. However, the donors must be aware that the guarantee that the IRS will honor the receipt is not 100%.

The reason it is not guaranteed is because section 170(c) gives clear details that the organization must operate in a manner that is consistent with section 501(c)(3). This means that in the absence of the church's official 501(c)(3) status, the donor must bear the burden of proving that his or her donation is tax-deductible by showing that the church meets all of the requirements of section 501(c)(3).

(Recommended reading: "Restricted Offering vs. Designated Offering")

Closing

While giving to my church is not motivated by the tax deduction, I am aware that I steward the money in my possession. Anytime I am able to maximize my stewardship, I will do it. I think many will agree with me that good stewardship seeks to maximize the impact of the finances entrusted. Depending on your tax bracket, a tax deduction can save you up to 33%.

I highly recommend that every pastor and leader across America take a step of due diligence and secure the 501(c)(3) status of his church. By doing so, you take away the possibility that a member of your church who gets audited be denied a tax deduction because the church failed to secure and maintain its 501(c)(3).

And then lastly, if you have any questions regarding church compliance and the steps that are necessary for your church to take, I want to invite you to call our office, toll free, at 877-494-4655, or join us at one of our upcoming Ultimate Church Structure Conferences.

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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.