What's the Difference Between 508 and 501(c)(3)?
By Derek Myers
*This blog was written in collaboration with StartCHURCH’s CEO, Scott Ritzheimer, and church planting specialist, Derek Myers.
“So, I’m a 508(c)(1)(a) church; I’m a free church. I don’t need the 501(c)(3)!”
The pastor making this comment was sincere in his response to a discussion between a group of pastors who applied for 501(c)(3) status. The group ensued in a debate about whether a church really needed 501(c)(3) tax-exempt status.
“As a church, we’re automatically tax-exempt,” the pastor went on. After a few minutes, the discussion moved on and the group of pastors went their separate ways, all a bit confused about what the difference was between a 508(c)(1)(a) church and 501(c)(3) church.
Maybe you’ve found yourself in a similar discussion, be it in person or online. Perhaps you’ve been confused on what 508(c)(1)(a) and 501(c)(3) really mean.
In today’s blog, we’re going to attempt to help clear the fog on what the difference is, what it means for your church, and how you should respond. Our goal is that at the end of this article, you know what the right next step for you is. Let’s jump in!
Comparing Section 501(c)(3) and Section 508
You may have heard that churches do not have to apply for tax-exempt status under Section 501 because they are automatically exempt under Section 508. You may have even heard 508 churches are free and that by filing for tax-exempt 501(c)(3) status you will place your church under government censorship and control. Could this be true?
First, let’s look at Section 501(c)(3). Here we see religious, charitable, scientific organizations (among others) are exempt from federal income tax. This right comes with responsibilities that are enforced by the IRS. Here’s a short list of some of the main responsibilities of a 501(c)(3) church.
- The organization cannot carry on a trade or business for profit (Section 502)
- The organization cannot be used for unreasonable private gain (Sections 501 and 503)
- The organization cannot spread propaganda or influence legislation (Section 501)
- The organization cannot promote a candidate during an election (Section 501)
- The organization must file an annual tax return (Section 6033)
- The organization must apply for official recognition from the IRS (Section 508)
Section 508, there it is! Now, you may be wondering, if section 508 requires section 501(c)(3) organizations to file for official recognition of tax-exempt status, why would someone claim to be a 508 church? Great question! The answer lies in subsection (c). In IRC Section 508(c)(1)(A), Congress included a mandatory exception for churches. This is great news, but an exception from what?
Paying taxes? No.
The restriction on promoting a candidate? No.
The restriction on for-profit activities? No.
Government control? No again.
Maybe, the requirements of section 501(c)(3)? 100% No.
No, the exception in 508(c)(1)(A) is from the “notification requirement” in Section 508(a). That’s it. Your church may “be treated as an organization described in section 501(c)(3)”, even if it doesn’t officially apply.
In terms we can all understand, Section 508 actually means that churches will be governed by the IRS, granting the church all the rights and responsibilities regardless of whether or not it applies for official recognition.
The burden of proof
For additional proof, we can look to Jack Lane Taylor v. Commissioner*
Section 508(c)(1) simply relieves churches from applying for a favorable determination letter regarding their exempt status as required by section 508(a). Nothing in section 508(c)(1) relieves a church from having to meet the requirements of section 501(c)(3). [Emphasis mine]
Let me be clear, Section 508 does not define a church, nor does it grant a church special government-free tax-exempt status. There is, in fact, no such thing as a 508 church.
However, and here’s a very important catch, there is a difference for a church that claims its exempt status under 508(c)(1). How can this be?
The Internal Revenue Code does not define what happens when a church doesn’t receive official recognition. To find that answer, we need to look to the courts. Let’s return to the Jack Lane Taylor case for our answer.
In fact, it is clear that when the Commissioner determines that an organization is not entitled to an exemption as a church, as is the case for IBT, its 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.
Wow! If you rely on section 508(c) and do not file for recognized 501(c)(3) status, you are actually handing that burden to each and every one of your donors. This even includes you personally if you give to the church and write off your donation. If you or one of your donors is audited, the donor must establish or prove that your church meets all the requirements and qualifications of a section 501(c)(3) organization.
The real question regarding 508 and 501 is why a church would do this to its donors?
In case you’re wondering if this is really true, the same interpretation of the law is found in Branch Ministries vs. Rossotti, which states:
because the church has not previously been determined by the IRS to have met the Section 501(c)(3) criteria, there is no presumption that the church is tax-exempt under Section 501(c)(3).
Not only does section 508 not relieve a church from its requirements, but a church that relies on it may also be presumed to be non-exempt!
In summary, whether a church files for tax-exempt status or not, it is subject to all of the requirements placed on a church by section 501(c)(3). Further, when a church does not file for official recognition from the IRS, it’s donors cannot assume their giving will be tax deductible. Instead, if audited, it would be the donor’s responsibility to prove to the IRS that the church qualifies under section 501(c)(3).
If you have not already received your favorable determination letter from the IRS, Filing IRS Form 1023 to receive official IRS recognition (in addition to all of these benefits) is one of the best ways you can show appreciation to your donors and help ensure the tax-deductibility of their generous gift. Don’t put your donors at risk.
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The good news
Had the pastors known the truth that 501(c)(3) is not meant to bring harm or hinder the message of the Gospel, they could have all left their conversation being clear on the truth.
The fact is, churches with formal 501(c)(3) approval are given the security and peace of mind that comes with a favorable determination letter issued by the IRS.
With donors protected and your church assured of tax-exempt status, you can live in the freedom that comes with the security of official 501(c)(3) approval. No confusion, no uncertainty, and no vulnerability for the faithful givers in your congregation.
If you haven’t taken the step to get 501(c)(3) status for your church or you still have questions about the process, our experts at StartCHURCH are here to serve you. In the past two decades, we have taken thousands of churches and ministries through our comprehensive StartRIGHT Service and have never been denied 501(c)(3) approval.
Don’t let this process overwhelm you. You’re not alone in this journey to protect what God has called you to lead. Give us a call today at 877-494-4655, and we would be honored to help ease the administrative burden through our StartRIGHT Service. What compares to having peace of mind and a 100% guarantee?
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26 U.S. Code § 501. Exemption from tax on corporations, certain trusts, etc. https://www.law.cornell.edu/uscode/text/26/501
26 U.S. Code § 502. Feeder organizations. https://www.law.cornell.edu/uscode/text/26/502
26 U.S. Code § 503. Requirements for exemption. https://www.law.cornell.edu/uscode/text/26/503
26 U.S. Code § 508. Special rules with respect to section 501(c)(3) organizations. https://www.law.cornell.edu/uscode/text/26/508
26 U.S. Code § 6033. Returns by exempt organizations. https://www.law.cornell.edu/uscode/text/26/6033
BRANCH MINISTRIES v. ROSSOTTI https://www.irs.gov/pub/irs-utl/branch_ministries.pdf
Riemers v. Commissioner [Dec. 38,181(M)], T.C. Memo. 1981-456 https://www.leagle.com/decision/198188042gftcm8381693
Hall v. Commissioner [Dec. 37,513(M)], T.C. Memo. 1980-576, affd. 676 F.2d 692 (4th Cir. 1982) https://www.leagle.com/decision/198066541extcm6241512
Taylor v. Commissioner, No. 14021-98, T.C. Memo. 2000-17 https://www.leagle.com/decision/2000144379qtcm136411427