Simply put, being a 501(c)(3) means that the IRS approves you as a tax-exempt, charitable nonprofit organization. As a church or ministry, you will not have to pay taxes on donations, and your donors will be able to claim their contribution(s) as a write-off for their taxes.
There are several benefits to obtaining 501(c)(3) status. Essentially, getting 501(c)(3) status can potentially save a significant amount of money for your church or ministry through various tax exemptions.
- The sales tax exemption releases an individual or business from paying taxes on the sale of merchandise or service, enforced by the state government. Currently, over 30 states offer sales tax exemption. However, 16 of those 31 states require your church or ministry to have 501(c)(3) status to file for sales tax exemption.
- The Franchise Tax Exemption releases an individual or business from paying a levy for doing business within the state. Some states, like California and Utah, offer only franchise tax exemption for churches and ministries.
To learn more, read our blog: 1 Step Leads to 7% Budget Increase.
Both churches and ministries fall under section 501(c)(3) as charitable nonprofit organizations, meaning that both are tax-exempt. However, there are well-defined differences between the two, specifically when it comes to filing requirements.
- For the IRS to classify your organization as a church, you must meet a few criteria: regular meetings, a congregation, and an established place of worship.
- Nonprofit ministries must file for tax-exemption within 27 months of the date of incorporation. Churches have more leniency.
- Every year, ministries must file a Form 990 with the IRS. Churches, however, are exempt from filing Form 990.
After submitting the 1023 application to the IRS, the average processing time ranges between 3 to 6 months.
Small nonprofits may be eligible to file Form 1023-EZ to obtain 501(c)(3) status. The average processing time for that application ranges between 1 to 3 months. However, churches are not eligible to file for Form 1023-EZ.
Churches are automatically considered tax-exempt. Therefore, they can receive donations even without applying for 501(c)(3) status.
Non-church entities, such as ministries and community development corporations (CDC’s), need to apply for federal tax-exempt status using Form 1023. The IRS gives these organizations a window of 27 months from the incorporation date to apply for 501(c)(3) status. If the application is submitted within that timeframe and approved, the tax-exempt status is retroactive back to the incorporation date.
Many nonprofits in our StartRIGHT Service begin receiving donations after incorporation.
Once the IRS has given you 501(c)(3) status, you do not have to renew it. However, in addition to maintaining compliance at the state level by filing required annual reports or registering in your state as a charitable organization, you do have to maintain your status by filing a Form 990 every year with the IRS, unless your organization is a church. If an organization does not file a Form 990 for three consecutive years, the IRS may revoke their 501(c)(3) status.
To learn more, read our blog: Can You Lose 501(c)(3) Status?
When the IRS revokes an organization's 501(c)(3) status, that organization now has to pay income taxes on any revenue generated, including donations. Additionally, donors can no longer deduct their gifts and cannot get a tax write-off for donations. However, there is good news! If the IRS revokes your 501(c)(3) status, you can get it back!
The most common reason an organization loses its tax-exempt status with the IRS is the failure to file Form 990 for three consecutive years. In this case, the IRS will send the organization a letter notifying them of the revocation and will add them to their Auto-Revocation list.
An organization that has been auto-revoked by the IRS may apply for a reinstatement either using Form 1023 or 1023-EZ. If the organization has received $50,000 or more in any of the past three years, they may also need to file Form 990 or 990-EZ for each of those years for the reinstatement to be retroactive. There are several factors to consider when reinstating a revoked organization, including the organization's income and how much time has passed since the revocation date. For a comprehensive guide, check out the IRS website.
Non-church nonprofits are required to file a Form 990, 990-EZ, or 990-N, depending on the value of assets and income each year. An organization that fails to file the required information return for three consecutive tax years will automatically lose its tax-exempt status.
Additionally, if an organization files a Form 990 past the due date, the IRS may impose a penalty.
The penalty for organizations whose gross receipts are less than $1,000,000 for its tax year is $20 per day for each day the return is late, up to $10,000, or 5 percent of the organization's gross receipts, whichever is less.
The penalty for organizations whose gross receipts are more than $1,000,000 for its tax year is $100 per day for each day the return is late, up to $50,000.
To learn more, visit the IRS website.
While all other nonprofit organizations must file an annual Form 990, churches do NOT have to file an annual Form 990 with the IRS. Under Section 6033(a)(3)(A)(i), churches, their integrated auxiliaries, and conventions of churches are exempt from filing Form 990. However, if a church has engaged in unrelated business income, they have to file a Form 990-T.
To learn more, check out our blog: The Ultimate Guide to Starting a 501(c)(3).
You should have a minimum of 3 people on your board. Typically, these roles include the President, Secretary, and Treasurer.
Yes, you can! However, if you have family members on your board, you must "balance" it. Creating a balanced board means that there must be more board members unrelated than those related by family.
To learn more, read our blog: Is Your Board Balanced?
In essence, board meeting minutes are documented discussions and decisions made by the board of directors. Those minutes must also be read by each board member and approved by a vote from the board. In short, when your church has a board meeting, it must be documented in minutes.
Think of board meeting minutes as a receipt. Without a receipt, you have little to no proof of purchase. Without board meeting minutes, you have little to no evidence of the decisions properly approved at your church to show to the IRS. Board meeting minutes, therefore, must be taken at each board meeting and correctly formatted.
To learn more, read our blog: Do You Know How to Take Board Meeting Minutes?
The housing allowance is the #1 tax benefit in America for pastors and ministers. The housing allowance is a portion of the board-approved salary a minister is already receiving that is excluded from their taxable income. By saving on taxes, you're increasing your monthly paycheck.
To learn more, read our blog: 4 Housing Allowance Myths You Need to Know.
The housing allowance is not just a portion of the pastoral salary that is excluded from taxable income. It can also include expenses like rent or property tax, furniture and appliances, and utilities.
Ordination is both a spiritual and legal action. To become legally ordained, you must be selected through a "considered, deliberate, and responsible act." This means that your church must have an ordination program that you can go through to be legally ordained.
To learn more, read our blog: Is Your Ordination Really Legal?
Being ordained does have its benefits, especially when it comes to taxes. Housing allowance, opting out of self-employment taxes, and mileage reimbursement for church business are the three main benefits that ordained ministers enjoy.
Yes! According to the Cramer v. Commonwealth ruling in Virginia back in 1974, courts noted that the selection of a minister by a church "must be a considered, deliberate, and responsible act."
As long as your church plant has a legally compliant ordination program, there will be no issue in the eyes of the law.
To create a legally compliant ordination program, check out our video course, Equipped to Ordain!
To help fulfill this requirement, your church should create a licensing and ordination program comprised of the following ten components:
- Ensure your corporate documents, such as the articles of incorporation, bylaws, and board meeting minutes, contain language stating that your church intends to have or already has a licensing and ordination program.
- Require a certain set of criteria to be met by the applicant, such as classes, on-the-job training, volunteer work at the church, or involvement in the local ministry. Keep a good record of all ministers that are licensed or serving under the apprenticeship of a pastor.
- Require an application with a fee.
- Require an exam to be taken and passed with a minimum required score.
- Establish a formal process of commissioning.
- Assign the ordination an expiration and renewal date.
- Require a renewal process by either application or written letter requesting a renewal.
- Keep a good record of all ministers commissioned, licensed, ordained, active, inactive, and revoked.
- Make sure that his/her role as a minister is conveying your church's message and mission.
- Require that the minister maintain a meaningful relationship with the ordaining church by attending conferences or services at least once a year.
To learn more, read our blog: 3 Common Myths About Ordination.
A bookkeeper handles many important responsibilities, from keeping records of your finances and expenses, to protecting your financial assets, to giving unbiased advice based on your records. Ultimately, bookkeepers set you up for success to reach your financial goals. Here at StartCHURCH, our ministry-minded bookkeepers will learn your vision and your ministry to specifically work towards achieving the plan God has placed in your heart!
To learn more, check out our blog: 6 Benefits of Hiring a Bookkeeper.
Yes! By helping keep track of your expenses and helping you create a healthy budget, bookkeepers can keep your finances compliant while saving you time, money, and added stress.
To hear a testimony of a time one of our bookkeepers saved a ministry money, read our blog: Bookkeeper Saves Church $8,000.
Opening a bank account is a huge milestone! Most banks require an organization to have articles of incorporation and a tax identification number (FEIN) to open an account. Having a church bank account provides credibility and professionalism to your church, giving members and donors security as they give tithes and offerings to your organization. It's a good idea to check with your desired bank for any additional requirements before opening an account for the church.
To learn more, read our blog: Most Common Questions Pastors Ask Part 2.
The short answer is yes, but there are some guidelines to follow. We recommend creating a benevolence program to best serve your community while ensuring you stay in legal compliance.
The IRS defines benevolence, under Section 102, as a gift given from "detached and disinterested generosity" and out of "charity or like impulses." This current interpretation of benevolence allows the recipient to receive the charitable gift tax-free. In turn, the church does not have to issue the recipient a Form 1099-MISC.
To learn more, read our blog here.
To give a benevolent tax-free gift to an individual, they’ll need to qualify for it.
Income Tax Regulation 1.501(c)(3)-1(d)(2) defines those who qualify for benevolence as:
- "persons who are financially unable to care for themselves as a result of sudden and severe or overwhelming financial burdens arising from events beyond their control are proper objects of charity because they are considered to be 'distressed.'"
Also, Income Tax Regulation 1.170A-4A(b)(2)(ii)(D) defines "needy" as:
- a "person who lacks the necessities of life, involving physical, mental, or emotional well-being, as a result of poverty or temporary distress."
This may come as a surprise to you, but not everyone can receive benevolence from your church.
Treasury Regulation 53.4958-39(b) details all those who are considered disqualified persons. In essence, those who have substantial control or influence in your church, along with their family members, are disqualified from receiving benefits from the organization. Therefore, board members and their direct family members are ineligible to receive any financial benefits from your church, benevolence included.
However, according to section 4958, disqualified persons may receive compensation in consideration of services rendered to the church.
To learn more, read our blog here.
The government gives certain benefits to pastors and ministers who have gone through a formal ordination process. Pastors can receive some significant tax breaks. However, they can also end up overpaying on their taxes if they're not taking full advantage of the benefits offered.
There are three main tax benefits for pastors:
- Housing Allowance
- Self-Employment Tax Exemption
- Mileage Reimbursement
Understanding and using these three benefits will transform your taxes and be a blessing to you.
To learn more, check out our blog 3 Must-Know Tax Benefits for Pastors and Ministers .
While many pastors hold dual-tax status, churches should issue W-2 forms to their pastors instead of 1099's, as the pastor is still an employee of the church and is compensated for carrying out the duties of their job when serving the church.
Many pastors hear the term "love offering" and assume it is a non-taxable gift.
To learn more, read our blog: A Simple Guide to Love Offerings.
Yes! Using a reimbursement plan for health insurance, a church can reimburse a pastor for health insurance up to the year's annual federal cap. For 2020, it was $5,250 for single employees and $10,600 for employees with a family.
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