501(c)(3) Approved by IRS, Revoked by State

By Raul Rivera

How familiar are you with your church or ministry's yearly state filing requirements? Is it something that you keep meaning to get around to, but never actually do? 

I am not asking to make you feel bad, because I understand where you are.

You get busy with the ministerial and spiritual side of leading a church or ministry, and as a result, the compliance aspect of ministry inevitably keeps getting pushed down on the list of things to do. 

Let me share with you the story of a church in California and how its failure to maintain compliance at the state level proved costly.

Rest assured their story does not end there because they acknowledged their weakness and were willing to ask for help.

California church loses state exemption

A church in California recently came to us for help. For privacy purposes, I will not reveal its name.

It was incorporated with the State of California, and it had also received its 501(c)(3) approval from the IRS. Additionally, the church had already applied for and received its franchise tax exemption with California. 

However, amidst the everyday responsibilities of running a church, the pastor had simply forgotten to file the state’s biennial report.

Most states require a similar report to be filed annually, but California requires this report be filed every two years rather than every year.

As a result of not filing this report with the State of California, the church was in bad standing, and its franchise tax exemption was immediately revoked.

I share this story not to make you feel overwhelmed with more to do, but rather, to show you the importance of maintaining compliance for your church or ministry. 

State filing requirements that your church or ministry cannot forget

We work with both churches and ministries in all 50 states. If there is one thing that can easily trip up churches and ministries in their quest to maintain compliance, it is the filing requirements at the state level. 

This is because the filing requirements of all 50 states differ to some degree. Additionally, in some states the filing requirements differ for churches and ministries.

From our experience in working with churches and ministries all across the country, there are two state filing requirements that tend to cause the most issues:

• a state’s annual report, and
• a state’s franchise tax.

1. Do you know if your state requires an annual report?

Currently, there are 44 states that require some form of report, whether it be annual, biennial, or periodic.

The requirements and due date of the annual report for each state vary, so it is important that you check with your state to verify if an annual report, or some variation of an annual report, is required.

There is no exemption available for your state’s annual report requirement.

Additionally, failure to meet the requirements of your state’s annual report can result in an administrative dissolution of your organization’s corporate status at the state level.

This can be costly because if your church or ministry is in bad standing with the state, it could negatively affect any exemptions you have with your state (e.g., a sales tax exemption and property tax exemption). 

Give us a call at 877-494-4655 to get your state's annual report filed.

2. What is a state franchise tax?

Franchise tax is a corporate tax levied upon a corporation for the privilege of doing business in a particular state.

Franchise taxes are commonly imposed upon any type of corporation, whether it be for-profit or nonprofit. This tax is usually based upon the corporation’s income for the year and is subject to a particular percentage defined by that state.

Most states automatically exempt charitable organizations from having to pay the franchise tax. Additionally, it is important to note that this is not the same as sales tax exemption, which only certain states offer.

There are three states that require charitable organizations (churches included) to either apply for an exemption or pay the annual franchise tax.

These three states are: 

1. California, 
2. Texas, and 
3. Utah. 

Next, we will look at the franchise tax requirements of all three states (California, Texas, and Utah) and how to apply for a franchise tax exemption.

Applying for a franchise tax exemption

As previously stated, most states automatically exempt charitable organizations from having to pay the franchise tax; however, there are three states in which charitable organizations must apply for an exemption: California, Texas, and Utah.

Let us take a brief look at the requirements for these three states.

1. California 

California requirements

California requires that all corporations pay an annual franchise tax. Currently, the annual rate for California’s franchise tax is $800.00 per year.

California does, however, allow nonprofit corporations to apply for an exemption.

If your church or ministry does not apply for an exemption and fails to pay the franchise tax within two years of being incorporated, your organization will be administratively suspended by the state.

In California, whether or not you have received your 501(c)(3) status from the IRS, you can apply for a franchise tax exemption.

2. Texas

For franchise tax purposes, all Texas nonprofit corporations are considered taxable entities.

In other words, Texas nonprofit corporations must apply for a franchise tax exemption or pay the annual franchise tax.

Currently, the franchise tax fee in Texas is estimated at $1,400.00 per year.

Applying for a franchise tax exemption in Texas includes exemption from the sales tax and use tax for all nonprofit organizations. Churches may also receive exemption from the hotel occupancy tax in Texas when applying for a franchise tax exemption. 

In order to apply for this exemption in Texas, all nonprofits, except for churches, must have 501(c)(3) approval from the IRS. The key factor for churches is that they must be actively holding worship services in order to apply.

3. Utah

The State of Utah also requires all corporations to pay an annual franchise tax. Currently, the franchise tax amount in Utah equates to either 5% of your church’s income or $100.00, whichever is greater. Similar to Texas, Utah requires organizations applying for the franchise tax exemption to first have 501(c)(3) approval.

Unlike California and Texas, the State of Utah has only one form for the franchise tax exemption. In the state of Utah, your church or ministry must complete and file Form TC-161. Also, a copy of your organization’s 501(c)(3) approval letter will need to be included when applying for the franchise tax exemption.

Failure to apply for the franchise tax exemption, or to pay the tax within two years, will result in a suspension of your organization’s corporate status in Utah.

So, what now?

There is a good possibility that you have heard some variation of the quote, “Knowledge is power.” To that, I would also include with power comes great responsibility.

Therefore, my question to you is, “What are you going to do with the knowledge you just gained?”

If you need help with the state filing requirements for your church or ministry, we can help!

Click on the link below to learn more or give us a call at 877-494-4655.

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