Section 501(c)(3) is the portion of the US Internal Revenue Code that allows for federal tax exemption of nonprofit organizations. In order to qualify as a tax-exempt, 501(c)(3) organization, a nonprofit must exist for one or more exclusively charitable purposes: religious; charitable; scientific; testing for public safety; literary; educational; fostering of national or international amateur sports; and prevention of cruelty to animals and children.
For most nonprofits, the IRS will only recognize the organization as a 501(c)(3) when it applies for such recognition by filing Form 1023 with the IRS, and it is then subsequently granted exemption in the form of an IRS determination letter. Churches, synagogues, mosques, and other places of worship (which we will collectively refer to as churches) are automatically considered tax-exempt by the IRS (as long as they meet certain basic requirements), without formally filing for recognition of 501(c)(3) status.
Since churches are automatically considered tax-exempt organizations, a lot of churches choose not to obtain 501(c)(3) approval based on widely believed misconceptions. For instance, one common misconception is that by seeking 501(c)(3) approval, a church will be needlessly burdening itself with additional governmental requirements and restrictions. In actuality, all churches (whether approved by the IRS or not) have to abide by all the same requirements under Section 501(c)(3). Another misconception is that 501(c)(3) approval provides no added value. As outlined below, there are various material reasons why a church should consider seeking 501(c)(3) recognition:
- Increase Donations: A church can dramatically increase donations if it obtains 501(c)(3) approval. Having 501(c)(3) approval assures the congregation and donors that the church is recognized officially by the IRS as legitimate and tax-exempt, thus guaranteeing their donations and tithes will be tax deductible. Although many small donors probably don’t care about the church’s 501(c)(3) status, larger donors expect churches to have an IRS determination letter. Taxpayers under audit who have their donations to a church challenged are at a distinct disadvantage if the church does not have a determination letter. If a donor is audited, he or she must establish or prove that the church meets the requirements and qualifications of a Section 501(c)(3) organization.
- Create Legitimacy: 501(c)(3) status increases the transparency of the organization, as the church will then be required to file a tax return each year. Those forms are available to the public, again, ensuring donors know that their money is being used in a charitable way. For churches that provide programming like missions work or children’s programs, this transparency can be a great way to let donors know that their contributions are going to a worthy cause.
- Vendor Discounts: 501(c)(3) organizations are given a variety of discounts and benefits. Many companies have programs that discount their services or products for established nonprofits like churches but require 501(c)(3) status to ensure the legitimacy of the organization.
- Presumption of Tax Exempt Status: The presumption of tax-exempt status does not exist unless the church has been officially recognized by the IRS to meet the requirements of section 501(c)(3). Churches that have never applied for 501(c)(3) status have not proven they are compliant with the law. If a church is ever caught functioning outside of the law, the revocation of its tax exemption will likely go back to the inception date of the church.
The implications of not obtaining 501(c)(3) approval are often misunderstood and can be costly. If you are looking to start a new church or retroactively obtain 501(c)(3) approval for your existing church, contact a Critchfield nonprofit law attorney today.