501(c)(3) church FAQs

February 11, 2021

What is a 501(c)(3)? How do churches become 501(c)(3)s? What are the biggest benefits and disadvantages of 501(c)(3) for churches? Let’s take a look at the most commonly asked questions about 501(c)(3) organizations—and what they might mean for your church.

This article is for informational purposes only—it is not intended to provide (and should not be relied upon for) tax or financial advice. For help filing as a 501(c)(3) or other tax questions, please consult with a tax professional or the IRS Tax Exempt & Government Entities Division.

       

What is a 501c3? And what are the benefits and disadvantages of a 501(c)(3) for churches?

1. What is a 501(c)(3) church?

The term “501(c)(3)” comes from the Internal Revenue Code Section 501(c)(3) that provides churches and religious organizations with federal tax-exempt status. 

The expression “501(c)(3) church” commonly refers to churches that qualify for this tax-exempt status through one of the following ways:

  • Applying and being registered as a 501(c)(3) organization with the IRS 
  • Meeting the requirements established by the IRS in section 501(c)(3)

2. What are the benefits of 501(c)(3) for churches?

Registering a church as a nonprofit with the IRS establishes its ability to meet the 501(c)(3) church requirements and qualifications as a charitable nonprofit organization. Even though there is no requirement to do so, many churches seek the benefits from registering as a 501(c)(3), such as:

  • Receiving a letter from the IRS designating that the church is tax exempt
  • Assuring donors that their contributions are tax deductible
  • Depending on their state, they may be exempt from state employment, sales, and/or income taxes
  • Exemption from paying federal unemployment tax
  • Availability of tax-exempt financing and reduced postal rates
  • Providing proof of 501(c)(3) status to qualify for nonprofit discounts from businesses

Another benefit of registering includes qualifying for free online donation tools like Subsplash Giving. Adding an online giving option increases church donations by an average of 32% and streamlines administrative tasks like sending tax statements!

3. What are the disadvantages of 501(c)(3) for churches?

Despite the benefits listed above, applying for 501(c)(3) nonprofit status has potential drawbacks too. Here are the four primary disadvantages and limitations faced by churches with 501(c)(3) status: 

  1. No private ownership—Unlike a business that is owned by an individual or private party, nonprofit organizations are publicly owned. 501(c)(3) churches cannot be sold like a business or transferred to private individuals by its founders. In situations where a church misapplies or misuses their assets (e.g., church funds used exclusively for the benefit of one person), the government can seize those assets. 
  2. No political campaigning or lobbying—Nonprofit churches that contribute or get involved in political campaigns risk losing their nonprofit status. 
  3. Limited purpose—501(c)(3) churches are subject to limited functions based on the law. If they act outside of those limitations, they can lose their nonprofit status. If they make money outside of their purposes, they can be subject to Unrelated Business Income Tax (UBIT).
  4. Loss of privacy—Nonprofit organizations are obligated to publicly disclose certain information. While 501(c)(3) churches are exempt from filing some of the same documentation as other nonprofit organizations, there is still information that is required to be public. 

4. Do churches have to file for 501(c)(3) status?

There is no requirement for churches to file for 501(c)(3) status with the IRS. The US government recognizes that churches provide unique services to their communities that are protected by the First Amendment of the US Constitution. Congress created special tax laws just for churches that exempt them from paying income tax and other federal taxes. 

This causes many people to ask, “Are all churches 501(c)(3)s?” The answer is that churches who apply and are approved for a 501(c)(3) status are recognized by the IRS as a designated 501(c)(3) entity. It’s also true that churches do not have to file for 501(c)(3) status in order to be tax exempt. However, it’s important to note that there are certain 501(c)(3) restrictions that churches must comply with to be considered tax exempt whether they apply with the IRS or not.

5. 501(c)(3) rules for churches

Here are the five primary 501(c)(3) rules that churches need to follow to retain their tax exempt status (regardless of whether they have filed with the IRS or not):

  1. The church must be legally formed as a corporation, trust, or association under local state law, and its operations must be exclusively used for religious or other charitable purposes
  2. The church’s net earnings may not result in inurement (i.e., “unjust payment of money”) to the benefit of private interests of individuals or shareholders
  3. The church may not use any substantial parts of their activities for influencing legislation or lobbying activities
  4. The church may not participate or intervene in political campaign activities
  5. The purposes and activities of the church must not be illegal or violate public policy

For more in-depth information, please visit the IRS website for exemption requirements.

6. How does a church get a 501(c)(3)?

For a church to apply for a tax-exempt status, they will need three basic things:

  1. An Employee Identification Number (EIN) application
  2. Form 1023 or Form 1023 EZ, the Application for Recognition of Exemption form
  3. Non-refundable user fee payment (ranging from $275 to $600)

Once approved, the church can obtain an Exempt Organization Determination Letter from the IRS confirming its tax-exempt status. This letter is public information available on the IRS website. It also can be used to help establish a church’s 501(c)(3) status when requested by state governments, businesses, and other organizations to establish tax exempt status. 

7. Is there a 501(c)(3) church list?

Some people want to ensure their donations are tax deductible by verifying their church’s tax exempt status is recognized by the IRS. The IRS offers a downloadable list of all registered 501(c)(3) non-profit organizations, updated on a monthly basis.

The simplest way to find a church on the IRS’s 501(c)(3) list is by using their Tax Exempt Organization Search tool (formerly known as “Select Check”). Currently there are more than 2.6 million non-profit organizations registered in their 501(c)(3) church lookup database!

8. Can a church qualify as a 501(c)(3) through their denomination or association?

If your church is affiliated with a centralized parent organization (such as a denomination or ministry association), you should ask them if they have secured a “group ruling” for a group exemption.

Church parent organizations can file for group rulings to identify their affiliated churches and automatically provide them with tax-exempt organization status. Churches on these lists do not need to take any more steps to obtain recognition as a designated 501(c)(3) nonprofit from the IRS.

The good news about Section 501(c)(3) is that churches are considered exempt from federal taxes whether they register or not with the IRS. As long as your church adheres to the IRS’s tax exemption status requirements, your donors can deduct their donations when they file their personal tax forms.

Subsplash is committed to helping your church grow and Fuel Your Mission™. Subsplash Giving guarantees that your donations will increase by allowing your donors to give on your website, mobile app, or through text-to-give. Better yet, there are no monthly fees, and Subsplash Giving offers the best rates in the industry with GrowCurve™!

To find out how Subsplash can help encourage generosity, let’s chat

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