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What To Do When It's Time to Reclassify Your Ministry

By Raul Rivera

Did you know that not all religious organizations are treated the same by the IRS?

The benefits to donors are virtually the same; whether you donate to a Christian orphanage, a church or inner-city ministry, donations are tax-deductible as long as they are formed and operated correctly.

However, for tax purposes, churches are classified differently than all other religious charities.

All religious charities are classified under section 501(c)(3), and are therefore exempt from income taxes. From a tax and legal standpoint, one of the biggest differences between churches and other religious charities is the requirement to file form 990.

Simply put, churches are exempt from having to file form 990.

But when it comes to changing the structure of your organization, there is much more that must be considered.

How to know when your classification changes

How your church or ministry is organized determines how it is classified by the IRS. How it is classified by the IRS determines what reports and requirements your organization must meet each year at the federal level, and some times the state level as well.

When an organization’s purpose and activities change in a substantial way, depending on the types of changes you make, there is potential that the changes to how you operate will also affect how your organization is classified as a public charity.

An in-depth study of classification for charities is outside the scope of this article. (You can enroll in our online program, StartCHURCH University, to learn more about this and other church and ministry compliance topics. Click here to learn more.)

The main point I want you to learn today is that the way your church or ministry is formed, determines your federal charity classification. Furthermore, how your organization is classified determines your church’s or ministry’s reporting requirements to the IRS.

Why you would need to consider reclassifying your ministry

When your organization’s activities change in such a manner that it would necessitate a new classification, the IRS should be notified.

For 501(c)(3) religious organizations, there are two common reasons why you would need to reclassify:

1. Transitioning to operate as a church

Perhaps you can relate to this.

Maybe you started as an evangelistic ministry that travels and speaks at other churches, but over the course of time the Lord has been leading you to start a church.

From a legal standpoint, what are you supposed to do?

We have worked with ministry schools, evangelism organizations, and even inner-city outreaches that, through their activities began holding worship services and found that their ministry would better serve the needs they were meeting with a church structure.

These organizations originally applied for their tax exemption as public charities that, though religious, were not churches. When their purpose and operations become that of a church, they reclassified as a church.

2. Transitioning to operate as a charitable organization that is not a church

Transitioning from a church to another type of ministry can happen in a variety of ways, and for a variety of reasons. Consider the two examples below:

Example 1:

Tim knows he is called to teach the Word of God and help believers apply it to their daily lives. After speaking with his mentors, he decides to start a church to carry out this passion. After a year he realizes that, though he is a teacher, he is not meant to be a pastor. During that time frame he wrote a book about living your faith in the workplace and while promoting his book, Tim received several invites to teach the principles of his book at churches and conferences. One day he had an “aha” moment and realized that his gifting would best be used if he created a ministry to develop and teach discipleship training resources. He established a 501(c)(3) organization for this purpose and it became very successful.

How your church or ministry is organized determines how it is classified by the IRS.

Example 2:

Joanne and Joseph were pastors of a church that had 501(c)(3) approval. The church thrived for the first few years, but in year four attendance became stagnant. Joanne and Joseph’s church conducted an outreach to low-income families. As attendance dwindled at services, they focused more time on providing food and clothing to the poor. They eventually turned their church building into a temporary shelter that helped financially struggling families find permanent housing. They still used their church’s corporation to receive donations to fund their new charitable activities.

In each of these examples, these leaders made significant changes in their activities that meant they no longer operated as a church.

The IRS uses a 14 point test to gauge whether or not an organization qualifies as a church for the tax-exempt status requirements. This test is a guide used to gauge whether the primary purpose of a charity is that of a church or not.

Where each of their original activities in the examples above would classify as a church activities, they each transitioned into equally great organizations with vastly different purposes.

This is not to say that churches cannot have varied activities. Churches can, in fact, create discipleship programs and conduct local and global missions.

However, if an organization’s main focus shifts from being that of operating a church to another activity, such as a transitional housing program, its status as a charity changes by default.

Why proper classification matters

You may be thinking, “What’s the big deal? A charity is a charity. Both are tax-exempt, so why does a change in operation matter?”

Ensuring that you maintain the proper classification is key for several reasons:

1. Reclassifying as a church means you are now exempt from the 990 filing requirements.

As previously stated, churches are exempt from the 990 filing requirement. If an organization that was formerly not a church changes its purpose and operations to that of a church, it can apply for reclassification. If the organization is reclassified as a church then it will become exempt from the 990 filing requirement.

2. Protection in the case of an audit.

This point is key primarily for those who should be filing form 990 and are not. If an organization that was once a church, transitions to non-church activities and is audited for any reason, the IRS could penalize it for failure to file form 990.

It can be concluded that your organization is no longer a church when it stops acting like a church.

In the 2nd example above we see the story of a couple who was classified as a church but began operating with a different purpose. This type of change in purpose is completely acceptable. However the appropriate steps should be taken to ensure that the legal structure of the organization reflects its new purpose.

In addition to amending the purpose statement in the organizing document, the corporation should change its classification with the IRS to note that it is a public charity that is now no longer a church.

3. Grant and funding eligibility based on IRS classification status.

You may find that when applying for certain funding, a “yes” or “no” may ride on having consistent governing documents and being classified as a particular type of charity. Proper classification can help make your application process for funding as a charity a smoother process.

4. It’s the right thing to do.

If you have partnered with StartCHURCH for any length of time and have gone through our StartRIGHT® Program, then you will know that our goal is to ensure that you have the best legal foundation possible.

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Part of this is ensuring that your governing documents and all your state and federal “accounts” reflect your organization properly.

To maintain ultimate compliance, updating your classification status is important.

What do you do when the classification changes?

There are several steps to take when your organization’s charity status changes.

  • First, ensure that your articles of incorporation reflect your organization’s current purpose. For instance, in Tim’s story, had he already incorporated, his purpose statement would be amended from that of a church to that of a ministry providing educational and training services to the body of Christ.
  • Secondly, update your bylaws to also reflect a more fitting governing structure. Bylaws for an evangelistic ministry will most likely be substantially different than those of a church.
  • Thirdly, the IRS provides a process for updating your classification through using form 8940. This is used for many reasons, but for our purposes, the form is used, along with the required attachments, to request a change in classification based on a change in operations.

Good change is a good thing

Whether you have a ministry that has grown into becoming a church to better serve its community, or a church whose renewed vision in God requires a completely new direction, these changes are good.

No matter where you are or what changes you are needing to make, we can help you navigate this transition. With your input and vision in mind, we can help you to establish governing documents that reflect the dream and vision God has placed in your heart.

If you believe God is leading your ministry in a new direction and just need someone to talk with about what that may look like, we’d love to hear from you. Simply give us a call at 877-494-4655. Or if you’d like to speak with us in person, click here to find out when we’ll be in a city near you.

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