The Internal Revenue Code Section 501(c)(3) provides churches and religious organizations with federal tax-exempt status.

There is no requirement for churches to obtain this status, but there are several major benefits to registering as a 501c3 nonprofit organization.

In this comprehensive guide, we'll examine the benefits and disadvantages of 501c3 tax exemption for churches and provide tips and best practices for how you can obtain and maintain this for your church!

What is 501c3 Status?

501c3 status is a federal tax-exempt status that is granted to qualifying nonprofit organizations, including churches and religious organizations. The main reason any church would want to become a 501c3 organization is so the church may operate without paying federal income tax on their revenue and allow donors to make tax-deductible contributions.

To be considered tax exempt, churches must meet certain requirements established by the IRS, including 1) being organized and operated exclusively for religious, charitable, or educational purposes, and 2) not engaging in lobbying or political campaign activities.

I'll say this upfront: There is no requirement for churches to obtain 501c3 status. However, it can provide numerous benefits...

Benefits of 501c3 Status for Churches

Being recognized by the IRS as a 501(c)(3) organization offers benefits for churches and religious organizations. These benefits include:

• Tax-exempt status: Churches with 501c3 status are exempt from federal income tax on their revenue, which will save the organization a significant amount of money

• Tax-deductible donations: Supporters can deduct their contributions to established nonprofits like churches, which can encourage giving and help churches raise more funds

• State tax exemptions: Some states provide additional tax exemptions for churches with 501c3 status, including exemptions from state employment, state sales tax, and/or income taxes

• Exemption from federal unemployment tax: Churches with 501c3 status are exempt from paying federal unemployment tax, which also saves money

• Tax-exempt financing and reduced postal rates: Churches with 501c3 status may also be eligible for tax-exempt financing, which can help the organization save money on interest and other fees, as well as eligible for reduced postal rate

• Nonprofit discounts: Churches with 501c3 status may also be eligible for a variety of discounts and benefits from businesses, which is especially helpful for a new church or church plant as you are just beginning to purchase everything you need

• Reduced Online Giving transaction fees: Churches with 501c3 status may be able to receive lower transaction fees with online merchant processors, reducing the fees paid to receive donations online.

These benefits make obtaining 501c3 status an attractive option for many churches and religious organizations. However, there are a few drawbacks to being a 501(c)3 that many church leaders aren't aware of...

Disadvantages of 501c3 for Churches

Many pastors and church leaders I talk to are surprised to learn that there could be drawbacks to making their church a 501(c)3. Those include:

• No private ownership: Nonprofit organizations are publicly owned, which means that 501c3 churches cannot be sold like a business or transferred to private individuals by their founders. Additionally, in situations where a church misuses or misapplies its assets (e.g., church funds used exclusively for the benefit of one person), the government can seize those assets

• No political campaigning or lobbying: Churches with 501c3 status cannot contribute to or get involved in political campaigns

• Limited purpose: 501c3 churches are subject to limitations based on the law. If they act outside of those limitations, they can lose their nonprofit status. If they make money outside of their purposes, they can be subject to Unrelated Business Income Tax (UBIT)

• Loss of privacy: Nonprofit organizations are obligated to publicly disclose certain information. While 501c3 churches are exempt from filing some of the same documentation as other nonprofit organizations, there is still information that is required to be public

Most leaders won't find these drawbacks to be an issue for them or their church. But it's important to be aware of them before taking the plunge!

With proper planning and adherence to the rules and regulations surrounding 501c3 status, many churches are able to reap the benefits of this status without running into any significant issues.

Do Churches Need to File for 501c3 Status?

In a word: No

Even if a church does not file for 501c3 status, they are still considered tax-exempt under federal law as long as they meet certain requirements, including being organized and operated exclusively for religious, charitable, scientific, or educational purposes and not engaging in substantial lobbying or political campaign activities.

There are still rules to follow

It's important to note that churches must still comply with the rules and regulations surrounding tax-exempt organizations, even if they do not file for 501c3 status.

This includes adhering to the limitations on political campaigning and lobbying, as well as being careful not to engage in any activities that would violate public policy or the law.

Consult with a professional

Churches that do not file for 501c3 status may still need to obtain state tax exemptions and comply with other state regulations related to tax-exempt organizations. It's important to consult with a tax professional or attorney to ensure that a church is meeting all applicable requirements and regulations, whether or not they have obtained 501c3 status.

Watch as Lorri and I dive deep into whether or not 501(c)3 status is right for your church:

How to Obtain 501c3 Status for a Church

To obtain 501(c)3 status for your church, you need to:

1. Obtain an Employer Identification Number (EIN)
2. Submit a Form 1023
3. Wait for the IRS to review your application (this part can take awhile)
4. Once approved, obtain an Exempt Organization Determination Letter

The process to apply for 501c3 status is simple but can be time-consuming. All application materials must be complete and accurate to avoid any delays or complications.

Pro Tip: It's recommended that ministries seeking 501c3 status work with a qualified tax professional or attorney to ensure that all requirements and regulations are being met.

Note: Once a church has obtained 501c3 status, they will need to maintain compliance with the rules and regs surrounding tax-exempt organizations, as outlined in the "Exemption Requirements" page of the IRS website. This includes careful record-keeping, regular reporting, and adherence to limitations on political campaigning and lobbying.

Is Tax Exemption Status Right for Your Religious Organization?

Obtaining 501c3 status can provide significant benefits for churches and ministries, including tax-exempt status, the ability to receive tax-deductible donations, and access to other perks like tax-exempt financing and nonprofit discounts! However, there are also potential drawbacks to consider.

With proper planning, churches can enjoy the benefits of 501c3 tax-exempt status and avoid any potential issues.

Matt Church Engagement