There is some confusion about whether or not churches need to apply for 501c3 exemption with the IRS. The answer is yes and no.
Churches are Automatically Exempt
According to IRS Publication 1828,
To qualify for tax-exempt status, [churches] must meet the following requirements:
• the organization must be organized and operated exclusively for religious … 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, and
• the organization’s purposes and activities may not be illegal or violate fundamental public policy.
So,
Churches that meet the 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.
Why Go to the Trouble?
The IRS 1023 form, used to apply for 501c3 exemption, is something of a beast. There are lots of essay answers and you have to compile financial data. It is not impossible, but I don’t know any pastors that got into ministry hoping to fill one of these bad boys out. Oh, and it costs $750 to apply.
The official reason to apply is not to determine if the church is exempt or not. All churches are. The question it does answer is whether your organization is a church or not. Wouldn’t it be awful to get audited by the IRS five years in and then have them come back and say, “No, you’re really a political activity committee,” or “You’re actually a financial counseling service.” Then all of the contributions ever made to the church could be nullified, and therefore taxable to the donors. Ouch. Fortunately, the IRS has never been in that business and generally takes an arm’s-length approach to churches.
Practically speaking, what it does is grease the donation wheels. Probably you didn’t know that churches are automatically exempt before reading this. Chances are really good that the manager at the local store that you are soliciting for a donation for your c0mmunity service event doesn’t know that either. Some will not donate anything until they have an IRS 501c3 determination letter with your church’s name on it in their hands. Sure, you could argue, “But we don’t need one!” But let’s face it, some corporations that provide nonprofit discounts and donations have a beauracracy that requires having that determination letter. Wouldn’t it be easier just to be able to hand them one?
So, you can decide for yourself whether to apply or not. Just know that it is way easier to apply at the beginning, because you get to use proposed budget figures for the financials. If you wait several years in, you’ll have to provide actual income & expense figures. That’s a taller order.
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Good article. couple of other points:
It is the way that you “act” that qualifies you as a 501(c)3 church. In other words, there is nothing that you can apply for that guarantees you 501(c)3 church status.
So, you can apply for and get one of these “IRS Determination Letters” that you describe in your article. BUT, if you later try to influence legislation, etc., then the government can come in and disavow your tax-exempt claim.
There are only 3 instances in the life of a church where we see the need for this “IRS Determination Letter”.
1) Corporate givers oftentimes ask for it. However, i haven’t seen a corporate gift in the last 3 years.
2) Post office requires it when you apply for a non-profit bulk discount. We don’t do “snail mail” campaigns anymore. Marketing for us is all internet driven.
3) We launch strategic partner churches throughout the country. Occasionally, a public school will require this “IRS letter” as a requirement for them to sub-lease their facility.
So, it’s really only issue #3 that we see the need. And, it’s only then that we apply for the letter. Lastly, we have an association that can immediately issue the letter. If you go directly to the IRS with this application, then it can take up to 6 months to get the approval and you don’t have to pay the $750 fee.