Churches that meet the requirements of section 501(c)(3) of the Internal Revenue Code (the “Code”), are automatically deemed to be tax exempt and are not required to apply for and obtain recognition of tax-exempt status from the Internal Revenue Service (the “IRS”) (i.e., obtain a “determination letter”). Although there is no requirement to do so, many churches choose to affirmatively apply for tax-exempt status for a variety of reasons, including to assure church leaders, members, and other donors that the church is recognized as exempt and qualifies for related tax benefits.
In this Q&A style article, our goal is to answer some of the most common questions from churches and to flag significant issues church leaders should consider when deciding whether to apply for a determination letter from the IRS.
Q: What is a “church”? How do I know if my organization qualifies?
- “Church” is not specifically defined for federal tax purposes. Though different approaches have evolved over the years, the IRS has identified 14 characteristics typically attributable to churches (e.g., recognized creed and form of worship, distinct ecclesiastical government, formal code of doctrine and discipline, etc.). After analyzing these characteristics and viewing other facts and circumstances, the IRS will determine whether an organization qualifies as a church.
- In everyday language, “church” sometimes refers to a Christian place of worship. The IRS uses church in a more generic sense to refer to churches, mosques, temples, synagogues, and others.
- In recent years, organizations like Focus on the Family and Family Research Council have successfully requested and obtained reclassification as a church from the IRS. One takeaway from the successful reclassification of these organizations is that church status may be available to a much broader group of organizations than might be thought. Organizations that don’t fit neatly within the traditional notion of a church should consult with legal counsel to confirm that church status is appropriate.
Q: If my church applies for tax-exempt status from the IRS, will we be required to annually file Form 990 with the IRS?
- Obtaining a determination letter from the IRS does not require that a church file Form 990, the annual informational return that most other tax-exempt organizations are required to file. Line 1 of Part IX of Form 1023 asks whether the applicant organization is “claiming to be excepted from filing [Form 990]” because of church status. Churches generally check “Yes” to this question to avoid triggering this annual filing requirement.
Q: If we decide not to file Form 1023, how will the public know that our church is tax-exempt?
- One benefit of obtaining a determination letter is that the church will appear as an organization eligible to receive tax-deductible charitable contributions on the IRS Business Master File, GuideStar’s charitable organization database, and sources that give donors assurance that their donation is tax deductible. In addition, a church that has a determination letter may provide a copy of it to potential donors and others. A church relying on the automatic exemption may not appear in publicly available databases, which may impact whether certain donors are comfortable making a contribution.
Q: Will having a determination letter benefit church members?
- If a church member or other church donor is audited by the IRS, he or she must establish that the church meets the 501(c)(3) requirements to support the deductibility of his or her contribution. A church that has relied on the automatic exemption may be asked by the donor under audit to submit documentation to show that it possesses the characteristics generally attributed to churches. In contrast, a church that has applied for and obtained a determination letter likely won’t need to go through such an exercise and should be able to confirm its 501(c)(3) status by providing a copy of its determination letter.
Q: My church has been part of a group exemption since it started. Does it make sense for us to apply for our own determination letter?
- This will depend on the church’s facts and circumstances. For example, it could make sense for a church to apply for its own determination letter if the church wants to distance itself from the denomination or other group exemption holder. There could be reputational concerns, doctrinal differences, or other reasons.
- A group exemption letter has the same effect as an individual exemption letter except that it applies to more than one organization. As discussed previously, churches are not required to apply for recognition of their own status to be tax-exempt; however, under the procedures for group rulings, a church must request recognition of its own exempt status to be the central organization in a group ruling (i.e., the group exemption holder). The determination letter issued to the central organization then applies to all organizations in the group.
- We’re happy to provide more information about how a church can be included in (or confirm that it is already part of) a group ruling.
Q: What is the impact of having a determination letter when applying for an exemption from state and local taxes? What about eligibility for the reduced nonprofit postage rate?
- A determination letter can be helpful when a church applies for an exemption from local real estate transfer taxes, property taxes, or sales and use taxes. Such exemptions may be available to churches without a determination letter; however, a church applying for these exemptions may need to provide additional evidence of its church status to local and state agencies. The requirements vary by state and local jurisdiction.
- A determination letter also can be helpful if a church applies for the reduced nonprofit USPS postage rate.
Please don’t hesitate to reach out to your Michael Best attorney if you need assistance with any of the issues raised in this article.