Tax Guide for Churches and Religious Organizations
Special tax laws in the US apply to churches, mosques, synagogues and other houses of worship. Congress has also enacted unique tax laws for ministers and non-church religious organizations. While the aforementioned groups are often tax-exempt, certain sources of their income may be subject to taxation however.
This guide helps explain how religious institutions can achieve or maintain tax-exempt status and comply with tax laws.
Before we begin, please note that in this tax guide, “church” refers to a house of worship for any religious group. “Religious organizations” include interdenominational and ecumenical organizations, nondenominational ministries and other organizations that are primarily devoted to studying or advancing religion.
Qualifying for Federal Income Tax Exemption
Like many other charitable groups, churches and other religious organizations generally qualify for exemption from US federal income tax. This exemption is provided for in section 501(c)(3) of the Internal Revenue Code (IRC). Typically, these groups also qualify to receive tax-deductible contributions.
Tax Exemption Qualification for Churches
Churches (but not other religious organizations) that meet the following criteria needn’t apply for tax-exempt status as qualification is automatic. Applying for an official declaration of tax-exempt status may be advantageous however, as it reassures charitable givers that their contributions are tax-deductible.
Your group is likely tax-exempt if:
1. The organization operates exclusively for charitable purposes (educational, religious, scientific or otherwise).
2. Its net earnings do not benefit a private individual (e.g., a shareholder).
3. It’s not substantially involved in lobbying.
4. It does not participate in political campaigns.
5. Its activities and aims are legal.
Tax Exemption Qualification for Religious Organizations
The same qualifications for tax exemption that apply to churches apply to non-church religious organizations. However, these organizations usually need to submit an application to the IRS to claim exemptions. An exception may be made if their annual gross receipts do not usually exceed more than $5,000. The application can be made with IRS Form 1023.
To be considered tax-exempt at the time of its establishment date, a religious organization’s Form 1023 must be submitted within 27 months of the end of the month in which it was formed. In contrast, a church is not subjected to time limits – it may receive recognition of tax exemption from the date of its formation, regardless of when that date may be.
A fee must be submitted for Form 1023 to be processed. You can confirm the current fee by calling Exempt Organizations Customer Account Services at 1-877-829-5500.
The Benefit of Formal Tax Exemption
Organizations that apply for recognition as tax-exempt groups are listed in the IRS publication entitled Cumulative List of Organizations Described in Section 170(c) of the Internal Revenue Code of 1986. The IRS sells this publication to the public and also publishes a free downloadable PDF of the list.
Maintaining Tax-Exempt Status
A church or religious organization can lose their tax-exempt status by violating the terms that allowed for its eligibility. In other words, their status is jeopardized if:
· Their net earnings inure (see an explanation of this term in the below paragraph) to a private shareholder or other individual.
· They provide a substantial benefit to private interests.
· They exert a substantial attempt to influence legislation (see the paragraph on lobbying below).
· They participate in a political campaign regarding a specific candidate for public office.
· Their goals and activities violate public policy or the law.
Inurement
Tax-exempt religious groups are not permitted to direct their assets to insiders such as ministers or board members. For example, a church would jeopardize its tax-exempt status by transferring property to an employee for less than its market value or giving unreasonable compensation to a church board member.
Substantial Lobbying Activity
Tax-exempt groups may engage in limited attempts to influence legislation. For example, they may hold educational meetings, distribute educational pamphlets and otherwise examine public policy issues.
Excessive lobbying is not permitted however – this occurs when a church or other religious institution contacts or urges others to contact a person connected to a legislative body for the purpose of proposing, opposing or supporting legislation. Furthermore, a religious institution may not advocate for the adoption or rejection of a particular law.
A group that engages in substantial campaign activities may not only lose its tax-exempt status but could also be taxed on its political expenditures.
Rules Applying to Tax-Exempt Churches That Make Money
A tax-exempt church or religious organization may engage in income-producing activities, but not excessively. Their net income may become subject to taxation if it’s derived from a trade or business that’s regularly carried on and is not substantially related to the group’s purpose for exemption. Exceptions may be made however – when most of the work is performed by volunteers, the business primarily serves the organization’s members or the business involves the sale of merchandise.
Special rules also apply to rental income earned by religious groups. For example, a church that charges for parking must pay tax on that income. Because church rental laws are complex, it’s best to meet with a professional tax consultant for personalized advice on this matter.
Paying Employment Tax
Churches and religious organizations are generally required to pay employment taxes. These include income tax and Federal Insurance Contributions Act or FICA taxes. Although the payment of church ministers is exempt from this rule, it’s not always easy to determine whether a worker is to be considered an employee. To determine a worker’s status, the church or the worker should file IRS Form SS-8.
Conclusion
By using this reference, representatives of churches and religious organizations can learn to achieve or maintain their tax-exempt status and comply with tax laws. This tax guide does not address every tax situation confronting religious institutions however, so for more detailed information it’s a good idea to contact a tax professional who can give your organization personally tailored advice.
About the Author: Bob Goren is an accountant and independent tax guide advisor in the US.
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