Do Churches Really Need 501(c)(3) Status?

By Raul Rivera

Should my church obtain a 501(C)(3) tax-exempt status? 

What are the benefits of having 501(c)(3) status? 

Am I inviting other government intervention into our church? 

At StartCHURCH, we hear these questions often. By reading this article, you will be able to make an informed decision about 501(c)(3) tax-exempt status.

The problem is, so much information exists on the subject that misinformation is prominent. If you google, “Do churches need to apply for 501(c)(3) status?” around 78 million results are generated. 

Information is easy to come by, but finding the right information is more challenging than ever. 

So, why should you trust StartCHURCH? 

StartCHURCH has over 20 years of experience in IRS compliance. In that time, we have helped launch thousands of churches, ministries, and nonprofits honestly and thoroughly. 

Click here to read what others are saying about StartCHURCH services.

Let’s talk about why you should consider 501(c)(3) tax-exempt status. 

The myth of “a church outside of the 501(c)(3) law”

We often speak with pastors who have received information from other pastor friends or illegitimate online articles without checking the sources.

One of the most common misconceptions we hear is, “I am a 508 church.” 

Many believe a “508 church” to be a church outside of the law. Still, the information about a church operating under 508(c)(1)(a) is misleading at best, and destructive at worst. 

Yes, section 508(c)(1)(A) of the Internal Revenue Code does relieve churches of the obligation to apply for 501(c)(3) tax-exempt status. 

But, there is no provision under the law that allows an organization, church or otherwise, to receive tax-exempt donations without meeting the requirements under section 501(c)(3).

In other words, churches are held to 501(c)(3) standards without ANY of the benefits if they do not apply for 501(c)(3) status. 

It’s like being allowed to drive your car, but only on Tuesday and Thursday. You can adjust your life around it, but someday you will need to get somewhere on a Friday.  

Applying for 501(c)(3) status is optional for churches, but to not do so can limit your church and ultimately be detrimental to its congregants. 

What happens if my church does not apply for 501(c)(3)?

We see in court cases, such as Jack Lane Taylor v. Commissioner, the burden that is placed on donors of churches without 501(c)(3) status. If a donor is audited, he or she must establish or prove that the church meets the requirements and qualifications of section 501(c)(3) organization.

What a burden for an individual to carry!

For this reason, many donors may choose not to donate to organizations without 501(c)(3) approval. Or worse, they may donate, get audited, and all the money they gave could be used against them. 

Also, the presumption of tax-exempt status does not exist unless the church has been officially recognized by the IRS to meet the requirements of section 501(c)(3). 

Churches that have never applied for 501(c)(3) status have not proven they are compliant with the law. If a church is caught functioning outside of the law, the revocation of its tax exemption will likely go back to the inception date of the church.

In the case of Brach Ministries v. Rossotti, Branch Ministries, a church, applied for and received 501(c)(3) exemption. The church was later found guilty of intervening in a political campaign, and its tax-exempt status was revoked.

The revocation went back to the beginning of the tax year, where it was found to be out of compliance. Had the church not applied for 501(c)(3) exemption, it would have likely been deemed a non-tax-exempt organization from the beginning of its existence.

501(c)(3) status protected this church, not hindered its religious liberties.  

What does the IRS consider a church?  

Some churches come to us years after their first service and already have hundreds of attendees. 

Other churches we work with are still in the planning phases or have just begun meeting in a home with a handful of congregants.

Size does not matter to the IRS, but actions do. 

There is no official definition of “church” in the tax code. When the IRS examines a 501(c)(3) application for church status, it uses a set of criteria known as the 14/15 Point Test.

This test provides essential guidelines to help the IRS and courts determine which organizations can be classified as a church for tax purposes. 

A few of these points are:

1. A distinct legal existence—Does your church have its incorporation and Federal Employer Identification Number (FEIN)?
2. A definite and distinct ecclesiastical government—Does your church have its own pastor, minister, or ecclesiastical board?
3. A formal code of doctrine and discipline—Does your church have a set of doctrines and beliefs that your congregants are expected to follow?
4. Established place of worship—Do your worship services take place in a stable location, preferably a public facility instead of one’s home?
5. Regular congregation—Are your church services regularly attended by the same group of individuals? Are multiple families represented?
6. Regular religious services—Does your church have regularly scheduled worship services? 

Now, no set number of “points” must be met. However, the more points you can meet, the better chance your organization has of being classified as a church for federal income tax purposes. 

Three benefits of incorporating your church now

Benefit #1: Forming a corporation at the state level establishes a corporate veil that separates the actions of the corporation from the actions of you and your church members. 

Without the corporate veil, members’ assets may be at risk in the instance of a lawsuit.

Benefit #2: Once incorporated, your church can adopt relevant governing documents like bylaws, written doctrines, and policies.

Likewise, your church’s governing body can legally ordain ministers and begin functioning in an ecclesiastical manner.

Benefit #3: Once incorporated, you will be able to open a bank account in the church’s name. This crucial step will allow you to deposit donations properly and monitor your church’s income and expenses. 

Keep in mind that most banks will ask for both the approved articles of incorporation and the FEIN. 

Have questions about obtaining a FEIN? Give us a call at 877-494-4655 and let us talk you through it! 

Why not start your church or ministry the right way?

A solid legal foundation is essential for a church to be lasting and impactful within its community. As every pastor knows, starting a church is a marathon, not a sprint.

So why should you consider 501(c)(3)?

Well, it is better to have a tool and not need it, than need a tool and not have it. 

501(c)(3) is not about government restrictions, but it is a God-given tool that removes unnecessary pressure from your church and your donors. 

Our goal at StartCHURCH is to help you establish a solid legal foundation for your church or ministry. Keep in mind that it is crucial you take time to consider all options when establishing your church’s legal foundation.

Give us a call at 877-494-4655 or schedule a free 30-minute consultation with a church planting specialist below to discuss our StartRIGHT Service.

Pace yourself to run the race that God has set before you, for he will give you the strength and resources you need to succeed. 

Let’s run the race together.  

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• Why Bylaws Are Important, And How to Make Yours Better
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