There can be a lot of confusion around the tax code. One argument I have way too often is when people try to argue with me about a church’s tax status. The argument is that a church gives up their freedom of speech if they become a 501(c)(3) but get all the benefits of 501(c)(3) without any of the speech restrictions under 508(c)1(a). Is this true?
Let’s look at the tax code for 508
(a)New organizations must notify Secretary that they are applying for recognition of section 501(c)(3) status
Except as provided in subsection (c), an organization organized after October 9, 1969, shall not be treated as an organization described in section 501(c)(3)—
(1)unless it has given notice to the Secretary in such manner as the Secretary may by regulations prescribe, that it is applying for recognition of such status, or
(2)for any period before the giving of such notice, if such notice is given after the time prescribed by the Secretary by regulations for giving notice under this subsection.
(b)Presumption that organizations are private foundations
Except as provided in subsection (c), any organization (including an organization in existence on October 9, 1969) which is described in section 501(c)(3) and which does not notify the Secretary, at such time and in such manner as the Secretary may by regulations prescribe, that it is not a private foundation shall be presumed to be a private foundation.
(c)Exceptions
(1)Mandatory exceptions Subsections (a) and (b) shall not apply to—
(A)churches, their integrated auxiliaries, and conventions or associations of churches, or
What does that mean?
That first section says that a charity cannot just declare themselves tax exempt and able to receive charitable contributions. They must apply to the IRS for recognition of such status (i.e., 501(c)(3) status). They would do this using either the Form 1023 or Form 1023-EZ. Most charities filing a Form 1023 will then have to complete a Form 990 to report their activities each year. They will also be listed on the IRS website as a charity.
Except churches! That second section…508(c)(1)(A)…states that churches are exempt from applying for 501(c)(3) status. They are not exempt from 501(c)(3) status they are automatically 501(c)(3). Churches are also exempt from Form 990. The IRS website restates this:
Churches (including integrated auxiliaries and conventions or associations of churches) that meet the requirements of section 501(c)(3) of the Internal Revenue Code are automatically considered tax exempt and are not required to apply for and obtain recognition of exempt status from the IRS.
IRS Website
What if my church doesn’t want to be a 501(c)(3)?
If your church is a 501(c)(3), you can’t:
- Operate to enrich your members. No dividends or profit sharing. The net profits can’t just go right in the pastor’s pocket. (What profits? Most churches like to just break even.)
- Operate for private benefit: Your church should exist for the public good. In our case, that is spreading the Good News. Most of your activities should somehow be related. If most of your income and expenses stray from that purpose, this could be a problem.
- Lobby too much: You can can lobby certain issues (gambling, abortion, etc.) but it shouldn’t be a significant expense. If your lobbying efforts are over 5% of your church’s budget, that’s likely too much.
- Campaign for or against specific political candidates: While individuals, even pastors, can personally support or oppose candidates, they can’t speak on behalf of the church. They can put out a voter guide concerning candidate positions or invite both candidates to speak at a church.
If you want to set your church up to enrich members, create an S Corp. If you want to set your church up for “private benefit,” just launch a for-profit small business. If you want to lobby, apply for 501(c)(4) status. If you want to campaign for individuals, setup a Political Action Committee.
Receiving donations from certain grants thru brokerage firms in the past we were asked for our 5013c group determination letter in order to release the fund as it is a prerequiste to receiving the grant, recently were required by Fidelity Charitable to complete a Grant Eligibilty Form as House of Worship, does the difference in determination disqualify churches from receiving certain grants.
This is a struggle for a log of Global Methodist churches. While they may automatically be considered a 501c3 under 508c1A, they still we need some proof. The Global Methodist denomination doesn’t have a Group Ruling so a church can either file for their own 501c3 or try our work-around letter (https://forms.gle/qAq8Wr74JuXYE1rh9).
Hi Do you still have this letter available somewhere?
Hey Anthony, Sorry for the slow reply. You can get a GMC letter by applying here: https://forms.monday.com/forms/5dd0144df5ec45955f6a2f044f4ea968?r=use1
Ok so if the letter of information GMC has provided does not suffice in certain situations; What suggestion do you have to remedy this for GMC churches?
Dee, I have had some churches pursue their own 501c3 recognition. Mostly they do this because they are receiving a grant where the the grantor requires an official letter. They hire a CPA usually and complete the Form 1023.
I have a friend who started a 508(c)1(A). I had a couple questions:
does she need to file a form 990 or 990 EZ or are there other forms needed when filing taxes?
She is also doing her annual giving statements to her donors. Is there any forms that need to be given or is it a simple letter with the donors information and the amount given?
Thanks Mark
As a church, the church would not have to file a 990. For annual giving statement, she would need the letters with the legal name of the church, the amount, and the time period the donations were received. If any single donation was $250 or more, those would need to be listed separately.
As a 508c1a, do I file a personal income tax return? Thank you.
You shouldn’t have to file a personal income tax return. For a church, it is very important to keep your personal finances separate from the church finances. Set up a different bank account and everything.