A #1 Common Mistake Pastors Make
By Valerie West
Read Time: 4.5 minutes
"What do you mean I have to pay taxes on all this? We are a nonprofit! We shouldn't have to pay sales tax on these supplies."
Unfortunately, the above statement is a widespread scenario for pastors and ministries across the country. You may be thinking that once you have 501(c)(3) approval from the IRS, you don't have to pay any taxes, right?
Wrong. It's an easy mistake to make. There is a huge difference between being federally tax-exempt and state tax-exempt; having a state tax exemption can put a considerable amount of funds back into your budget.
State vs. Federal
Let's distinguish between these two types of exemptions:
Federal tax exemption allows an organization to be free from paying income taxes on donated funds.
State tax exemption, also known as Sales Tax Exemption, is the exemption on tax collected from an individual or business for the sale of merchandise or service enforced by the state government.
Simply put, the government functions on two planes: the state level and the federal level. Furthermore, just because you have one type of exemption does not necessarily automatically grant you the other.
Considerations when applying
Another difference between state and federal exemption is that federal tax exemption is available to all charities that apply and meet specific requirements. Still, not all states offer state tax exemption. There are a few things to keep in mind when considering applying for state tax exemption:
1. Determine what exemption(s) your state offers.
Currently, over 30 states offer sales tax exemption. Some states, like California and Utah, offer only franchise tax exemption, whereas Texas provides a combination of the two!
2. Determine what the requirements are in your state.
Different states have different requirements. Most often, at minimum, the requirements for applying are:
- Articles of incorporation: The articles of incorporation always contain a purpose statement explaining your church or ministry's charitable and/or religious functions. This document will help serve as proof that the organization has incorporated with the state and will define its nonprofit status.
- FEIN (Tax ID number): The Federal Employer Identification Number is obtained from the IRS and is required for banking purposes, both for businesses and nonprofit corporations. When applying for sales tax exemption, the FEIN of the church or ministry needs to match the name that appears on your Articles of Incorporation.
- Bylaws: The bylaws are the official set of rules, guidelines, and regulations designed to influence and govern the organization's daily affairs and those involved with it.
- Financial Information: Most states require a copy of a church's latest financial statement. This helps the state monitor the financial activity of the church to see that its intended purpose is truly that of a nonprofit.
- Suppose your church is less than one year old. In that case, we recommend that you submit a financial statement covering the time from incorporation until the present, along with a projected budget for the following year. This is so that the state can see how the church intends to use sales tax exemption if approved.
- Federal Determination Letter: This letter is also known as an "approval letter" for 501(c)(3) status. Many states require nonprofits to obtain their 501(c)(3) status with the IRS before applying for sales tax exemption. The states recognize that the IRS has specific requirements that nonprofits must meet before becoming federally tax-exempt. The states' requirements often mirror those of the IRS, allowing the state to rely on the IRS' determination of an organization's tax-exempt status.
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3. Determine if you're ready to apply for sales tax exemption.
As you can see, each state has different filing requirements. Some states, such as Illinois, require that a church be meeting in a public facility and not in a home to apply. In contrast, Virginia requires that the church's administrative expenses not be more than 40% of their total income when they apply.
Though you may feel this is the right time to begin the tax exemption process, the state filing requirements may require you to meet certain specifications that you are not ready to meet yet.
4. Determine what the necessary forms are with the state.
The states that offer sales or franchise tax exemption have a form that can range from one to 20 pages. To find out more about your specific circumstances, give us a call at 877-494-4655. We are happy to discuss the process with you and what may be required depending on your state!
Add 7% back to your budget
By now, you realize that you are actually adding an average of 7% to your yearly budget by obtaining a state sales tax exemption, or more, to your annual budget, depending on your state's sales tax percentage rate.
We encourage pastors and leaders of churches and ministries to apply for this incredible benefit to help them make the most of the finances they have been given to steward. Just imagine filing one form and saving your church thousands of dollars in its annual operating budget!
Whether you're not sure if you qualify, you're uncertain of the requirements, or you're not even sure if your state offers this benefit, StartCHURCH is here to help. For more information on sales tax exemption offered in your state, or any other exemptions that could be saving your church or ministry hundreds or thousands of dollars each year, contact one of our church planting specialists at 877-494-4655 today; we are honored to serve you!
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