Understanding & Keeping Tax-Exempt Status

When it comes to taxes, things can get very confusing fairly quickly, especially for many churches. Sometimes, money can get tight. As followers of Christ, we want to make sure we're obeying our nation's tax regulations. At the same time, we also want to ensure we can spend all of the money we have for our ministries on those ministries.


So, we have enlisted UBA Administration Manager Dana Bowdoin to explain the nuts and bolts of tax-exempt status for churches. She and Ron Towery were working together on this article before he went to be with Jesus. Here, Dana lays out the qualifications, necessary documents, and guidelines for this helpful status which can keep church money flowing directly to necessary ministries.


Tax-Exempt Status

IRS Publications 1828, 4220, and 557 (available at www.irs.gov) cover 501(c)(3) Tax-Exempt status and tell us what we need to know.


Churches and religious organizations, like many other charitable organizations, qualify for exemption from federal income tax under IRC (Internal Revenue Code) 501(c)(3). To qualify for tax-exempt status, an organization must meet all the following requirements:

  • The organization must be organized and operated exclusively for religious, educational, scientific, or other charitable purposes

  • Net earnings may not inure to the benefit of any private individual or shareholder

  • No substantial part of its activity may be attempting to influence legislation

  • The organization may not intervene in political campaigns

  • The organization’s purposes and activities may not be illegal or violate fundamental public policy.

Automatic Exemption for Churches

Churches that meet the above 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.

Although there is no requirement to do so, many churches seek recognition of tax-exempt status from the IRS, because it assures church leaders, members, and contributors that the church is recognized as tax-exempt.

If the organization wants to establish its exemption with the IRS and receive a ruling or determination letter recognizing its exempt status, it should file Form 1023, which can be found at www.irs.gov along with all other forms.

Group Exemption

While duly constituted churches are automatically tax exempt under IRS guidelines, some organizations (such as banks) may still require 501(c)(3) tax exemption paperwork in order to recognize a church as a charitable organization.

 

State Baptist Conventions (both BGCT and SBTC) may have a group ruling covering all affiliated churches which eliminate the need to apply for a separate exemption. Churches cooperating financially with the state conventions may qualify under the Group Exemption provision of IRS statutes. For verification, member churches can contact the state convention directly to request a letter verifying tax-exempt status.

 

Churches that are recognized by their state Baptist convention and have contributed to the Cooperative Program are covered by the SBC (Southern Baptist Convention) group exemption and may request a copy of the Convention’s group exemption letter.

 

New church plants, during their pre-launch and launch phase, are covered by the SBC group exemption as a ministry of the church plant’s qualifying sponsor church. The sponsoring church may request a copy of the Convention’s group exemption letter and inform any organization requiring the paperwork that the church plant is the sponsoring church “doing business as” (DBA) the church plant’s name.

 

Jeopardizing Tax-Exempt Status

A 501(c)(3) organization can maintain its tax-exempt status if it follows the rules affecting these six areas: private benefit/inurement, lobbying, political campaign activity, unrelated business income (UBI), annual reporting obligation, and operation in accordance with stated exempt purpose(s).


Because of these guidelines, it's very possible to lose your tax exempt status without meaning to do so. Below is a helpful article detailing what may cause a risk to you tax-exempt status and how to avoid it:

Exemption from State Sales & Use Tax

Churches should register with the state using application form AP-209. Forms are available at www.window.state.tx.us. Click on tax forms and then applications for exemptions. To receive a state tax exemption as a religious organization, a nonprofit religious organization must primarily be an established congregation regularly meeting at a particular location to hold, conduct, and sponsor religious worship.

If the state recognizes the church as exempt, it will issue a letter that you can keep on file to document sales tax exemption. You will not need to attach the letter they give you to a sales tax emption certificate, and no number is assigned or required. 501(c)(3) documentation is not required to apply for sales tax exemption.