Tax Guide for Churches and Religious Organizations
Churches and religious organizations have a variety of tax credits available to help them fulfill their missions. However, these credits come with many rules and requirements. For those trying to determine the tax status of a religious organization, it can get complicated.
This tax guide for churches and religious organizations can help clear up some of the confusion, highlighting the information you need to know about tax statuses and exemptions.
Churches versus religious organizations
It's important to have a clear idea of the difference between a church and a religious organization, as defined by the IRS's Internal Revenue Code, or IRC.
The term church in tax code broadly refers to any house of worship—mosques, temples, synagogues and more all qualify for exemption from paying federal income tax. They fall under the classification of IRC section 501(c)(3), which grants houses of worship charity status. This status also means that generally, churches are eligible to receive tax-exempt contributions.
Generally, the IRS looks to some of these factors to determine if an organization is a house of worship:
- Religious history
- Defined places of worship
- Regular congregations and religious services
- Distinct legal existence
- An ecclesiastical government with rules, doctrines and a creed
While the IRS recognizes that no one thing determines a house of worship, it considers a variety of factors and approves requests on a case-by-case basis.
Religious organizations are considered different entities when compared to traditional houses of worship, but they can still apply for the same 501(c)(3) tax-exempt status. Religious organizations can be multi-denominational or even non-denominational and can be used to study or advance religion, but they're not considered houses of worship by the IRS.
What are the qualifications for tax-exempt status?
According to the IRS, five main requirements must be met for a house of worship to qualify for 501(c)(3) status, which labels it as a kind of charity.
- The organization must operate exclusively for religious, scientific, educational or charitable purposes
- The net earnings of the organization may not provide an advantage to a shareholder or private individuals
- The organization can't devote a substantial part of its activity to influencing legislation
- The organization can't intervene in political campaigns
- Any activities or purposes by the organization must be legal and in line with public policy
How to apply for tax exemption
If your church meets these qualifications, it's automatically granted exemption status by the IRS—there's no need to apply. However, some churches will officially apply for this status to assure church leaders, members and contributors that it has tax-exempt status and that contributions are tax deductible.
While houses of worship can automatically qualify for tax-exempt status, religious organizations must register as a 501(c)(3) charity. If the organization doesn't make above $5,000 in income each year, it doesn't have to register, although many do.
Organizations that want to file can refer to the IRS's Tax Guide for Churches & Religious Organizations (PDF). Here's an overview of the process:
- Make sure your organization is an association, trust or corporation with an active Employer Identification Number
- Review if your organization has an exempt purpose that will meet tax-exempt status
- File IRS application Form 1023 for exemption of tax-exempt recognition
- Gather and attach requested documents, including the organization's organizing documents
- Provide three years of tax documents and financial statements with detailed breakdowns of revenue and expenses
- If an attorney represents your organization, they'll need to fill out appropriate paperwork as part of the application
- Pay the required fee
From there, you'll wait to hear back from the IRS on the result of your application or with requests for additional information.
What are the record-keeping requirements?
Any tax-exempt organization needs to pay careful attention to its books, including churches and religious organizations.
The IRS provides specific record-keeping information to ensure ease of application. In general, organizations that qualify as 501(c)(3) charities must document all receipts, expenditures, income, expenses and credits and file IRS Form 990 each year. Organizations must make sure their books are available for inspection by the IRS at any time.
By adhering to IRS protocol and keeping up-to-date records, churches and religious organizations can more easily navigate the process and maintain their tax-exempt status.
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This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.