Does a Church need to be a registered 501 (c)(3) Tax-exempt Organization?
Although not all non-profit organizations fall within section 501(c)(3) of the Internal Revenue Code, religious organization do. As such, this article focuses only on those 501(c)(3) organizations and whether or not a church must apply for tax-exempt status.
According to the IRS, to be tax-exempt religious organization, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not attempt to influence legislation as a substantial part of its activities, and it may not participate in any campaign activity for or against political candidates.
Organizations described in section 501(c)(3) are commonly referred to as charitable organizations. Organizations described in section 501(c)(3), other than testing for public safety organizations, are eligible to receive tax-deductible contributions in accordance with Code section 170.
Churches that meet the requirements of IRC Section 501(c)(3) are automatically considered tax exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS.
However, many churches will obtain tax-exempt status from the IRS. This is because in doing so, the church, as well as its members and contributors will qualify for related tax benefits. The primary benefit for contributors being that their donations are tax deductible on their income tax returns.
Churches that are part of a denomination or parent organization, may qualify under a group ruling given by the IRS. In such instances, the parent organization is the holder of a group ruling that identifies other affiliated churches as exempt. A church is recognized as tax exempt if it is included in a list provided by the parent organization and no further action to obtain recognition of tax-exempt status is necessary.
So depending on the situation, a church may not need to apply for and receive tax exempt status from the IRS. This is not the case in California.
Most charities and nonprofit organizations operating in California must apply for and receive a determination or acknowledgement letter from the State Franchise Tax Board in order to be recognized as tax-exempt in the State. Unlike the automatic qualification under the IRS Code, churches and other religious organizations that desire tax-exempt status in California must apply for and be recolonized as such.
As per the State Franchise Tax Board, although most California laws deal with tax exemption patterned after the Internal Revenue Code, obtaining state tax-exempt status is a separate process from obtaining federal tax exemption. If a religious organization fails to apply for a receive tax-exempt status, it remains subject to the California Revenue and Taxation Code (R&TC) as a taxable entity.
Please note that churches and religious organizations may be legally organized in a variety of ways under state law, such as unincorporated associations, nonprofit corporations, corporations sole and charitable trusts.
Please see our other related articles
Choosing the Right Entity
Deductible Donations For Congregation Members
Churches and Property Tax Exemptions
Disclaimer: Every situation is different and particular facts may vary thereby changing or altering a possible course of action or conclusion. The information contained herein is intended to be general in nature as laws vary between federal, state, counties, and municipalities and therefore may not apply to any given matter. This information is not intended to be legal advice or relied upon as a legal opinion, course of action, accounting, tax or other professional service. You should consult the proper legal or professional advisor knowledgeable in the area that pertains to your particular situation.