2 Financial Benefits of 501(c)(3)

By Raul Rivera

There is one question I hear at almost every one of our Ultimate Church Structure Conferences: “Does my church have to apply for tax exempt status?”

There is no "one-size-fits-all" answer for this question. However, I always answer the same way, “It depends!”

It’s during this time that I like to challenge those attending the conference to think differently about how to structure their church.

Although your church is not required to apply for 501(c)(3) status, you need to consider whether or not you want your church to be eligible to receive all of the benefits that come with doing so. Just because a church is not required to apply for 501(c)(3) status, it doesn’t mean that the church shouldn’t.

Point of clarification

For clarity, if you are starting a church, you are not legally required to apply for 501(c)(3) status.

In short, section 508(c)(1)(A) says, and the courts have agreed, that a church that meets the requirements is automatically tax exempt.

I have had this quoted to me on many occasions as a justification for a church not applying for 501(c)(3) status.

Typically, when someone references section 508(c)(1)(A) the person speaking has almost completely forgotten about three words in that sentence, “ . . . meets the requirements . . .”

This section of the tax code is not saying that if you call yourself a church you are completely free of all adherence to the tax code. While it does relieve churches of the obligation to apply for 501(c)(3) tax-exempt status, it does not relieve the church from the requirement to adhere to that section of the code.

Essentially, it is saying you don’t have to apply, your tax exempt status is based on your alignment and adherence to section 501(c)(3).

In a case heard before the United States Tax Court (Jack Lane Taylor v. Commissioner), the court ruled that, “Section 508(c)(1) simply relieves churches from applying for a favorable determination letter regarding their exempt status as required by section 508(a).”

In fact, I believe that there are two financial benefits of 501(c)(3) that every church that applies for 501(c)(3) status will enjoy.

Two financial benefits of having your 501(c)(3) status

Benefit #1: Sales and Franchise Tax Exemption

In 31 states, churches and other nonprofit organizations can file for a sales tax exemption.

This means that churches in those states, who have correctly filed their sales tax exemption paperwork with their Secretary of State, do not have to pay sales tax when purchasing items for their church!

One important note is that 16 of the 31 states require organizations applying for sales tax exemption to have your 501(c)(3) status. 

In addition, there are three states, Texas, Utah and California, that require every corporation to to pay a franchise tax. This is basically a tax for operating in that state. Churches, with their 501(c)(3) status, can file for a franchise tax exemption.

Benefit #2: Guaranteed tax deduction on donations

Did you know that without having applied for your tax-exempt status, you cannot guarantee that the tithes and offerings you receive will be tax-deductible?

The law says that donors can make financial donations to your church and take a tax deduction on yearly filing for doing so.

However, without your 501(c)(3) status recognized by the IRS, if someone makes a donation and they were randomly audited, the burden of proving that your church is operating in accordance to section 501(c)(3) now falls upon the donor.

This means that the donor will have to show that the church meets and maintains all of the legal requirements of being a nonprofit.

If the donor cannot prove that, the donor’s donation could be voided.

Because of the stress and pressure that this puts on donors, many would-be donors have chosen not to donate to churches without their 501(c)(3) status.

Having your 501(c)(3) applied for and approved goes a long way toward developing donor confidence.

Do you have 150 extra hours?

Historically, applying for 501(c)(3) status with the IRS has been an arduous process.

The IRS itself estimates that the entire process of applying for 501(c)(3) status can take anywhere between 100 to 150 hours to complete.

For many years, this has been intimidating to many pastors and has resulted in them not taking the time to take this vital step in the life of their church. However, we can help you!

Through our StartRIGHT® Program, we’ve had the honor of helping more than 16,000 churches and ministries to obtain their 501(c)(3) status.

The StartRIGHT® Program puts the power back in your hands to take this step.

Are you ready to get your 501(c)(3) status today? Are you ready to take advantage of the benefits of such a step?

If so, call us today at 877-494-4655 and let us answer any questions you may about what applying for 501(c)(3) status may look like for your church.  

Related blogs for you:

• "Does a Church Need to Be 501(c)(3) Approved?"
• "How Much Should Churches Pay Guest Speakers?"
• "Is There a Difference Between Churches and Ministries?"

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