Do You Know How to Classify Your Ministry?

By Raul Rivera

When ministry leaders make the decision to pursue 501(c)(3) tax-exempt recognition, they are often unaware that there is more than one way to be classified for tax purposes. Many find themselves faced with the dilemma of having to determine if they should be classified as a church or as a religious nonprofit (ministry). In addition, many are unaware of the difference between the two classifications.

To understand the difference between the two is vitally important because to be classified incorrectly could cause potential administrative problems down the road. Therefore, during this post I will take time to explain the difference between a church and a ministry, for tax purposes, and then we will look at 4 questions for you to consider when determining how you should be classified.

Let us first begin by looking at the difference between church and ministry.

The corporate and tax differences

Choosing the best legal setup for your ministry is important because it affects many aspects of your nonprofit. These aspects include deadlines for IRS filing requirements, how to apply for state exemptions, how to form your corporation according to state law, and even funding from donors.

According to section 501(c)(3) of the Internal Revenue Code, religious organizations qualify as tax-exempt organizations. Additionally, according to section 170(b)(1)(a) of the Code, donors can receive a tax deduction for donations to these organizations.

This means that churches and all other religious ministries are given the same tax benefits as nonprofit corporations. However, there are some key benefits that need to be taken into consideration.

• Non-church, religious organizations are required to file for tax-exempt status within 27 months of incorporating. In order to ensure your tax-exempt status is retroactive to your day of incorporation, you must apply to the IRS within the 27-month window.
• Religious ministry nonprofits are also required to file Form 990 annually. Churches are exempt from these requirements and therefore enjoy a bit more administrative relief. If your ministry is not a church then it is best not to apply as a church because the incorrect classification can lead to problems down the road.
• Several states require that churches and ministries incorporate using different methods. For some states these corporations are created under different portions of state law. For instance, in both New Jersey and New York, churches are incorporated at the county level, while all other nonprofits are incorporated at the state level. In New Jersey, once churches become incorporated, they are required to send their documents to the state for filing.
• Additionally, every state has its own filing requirements for churches and ministries applying for state sales tax and franchise tax exemptions. Texas church corporations may apply for franchise and sales tax exemptions prior to obtaining 501(c)(3) approval. However, religious ministries and all other nonprofit corporations, must apply after obtaining it 501(c)(3) recognition from the IRS.

Determining the best setup

To help you determine which tax-exempt classification is best for your organization, consider the following questions:

1. Is my original goal to start a church?

This may seem like a simple question, but it is an important one. As you can see from the pastor’s story earlier, starting a ministry does not always mean you are starting a church. There are various types of ministries that can be started, such as:

• Conference and retreat ministries;
• Leadership training and Bible institutes;
• Crusades;
• Mentorship, and much more.

(Recommended reading: "Does a Church Need to be 501(c)(3) Approved?")

2. Will I have a congregation and membership?

When reviewing church applications for tax-exempt status recognition, one of the most heavily weighted indicators used to determine if an organization is a church for tax purposes is if it will have a congregation and membership.

In the court case Spiritual Outreach Society v. Commissioners, the tax court determined that holding religious meetings did not automatically make an organization a church. The court stated that there was no indication that participants in the monthly gathering considered Spiritual Outreach Society their church. It even held its events on Saturdays so as not to conflict with other Sunday worship services.

Therefore, if a ministry requires its participants to have their own local church that they attend, or is a ministry that says it will not have members at all, and is a fellowship of believers from many different churches, it will most likely be classified as a religious ministry for tax purposes.

Now, some churches choose not to have a rigorous membership program, and that is okay. I strongly recommend that you do establish membership requirements so that the standard of living and doctrinal beliefs of the church are clear.

Those who serve in the ministry will clearly understand where the church stands on every issue. Also, by forming a membership program, you have a stronger basis for establishing the lifestyle practices you expect from your members.

(Recommended reading: "Why Bylaws Are Important, And How to Make Yours Better")

3. Will I have frequent worship services for my members in an established location?

Another important component to receiving classification as a church is holding regular, religious services at an established location. Generally, it is best to hold these services at a public facility like a church, auditorium, rented retail space, or hotel. Some house church models that also host a monthly or quarterly public gathering will classify as a church, though you must be sure that your home is zoned for a church meeting.

Holding services once a month or only holding meetings in 1 home without plans to grow and expand beyond that home generally indicate that you are operating a religious ministry that is not necessarily a church.

4. Will all of my activities be outreach oriented?

If you find that all of your activities as an organization will be geared towards community outreach only, you will be best suited for a religious ministry classification. Though you may host a Bible study from time to time, you want your corporate foundation to be based on your primary purpose and activities.

Helpful examples

So far, we have talked in general terms and explanations. Now, let us take a look at a few examples of church vs. religious ministry setups to show how the concepts we have discussed can play out in everyday ministry.

Example 1: An itinerant speaker preaches every Sunday; however, he speaks at a different church every week and does not have a local congregation. He hosts a monthly worship experience in different cities throughout the U.S. to unify the Body of Christ. His ministry would file Form 1023 as a nonprofit religious ministry that is not a church.

Example 2:  A preacher holds bi-weekly worship services at a local hotel. He is currently saving money to rent a commercial facility and begin holding weekly worship services. He has a regular attendance of 45 people. They just began a simple membership program where those joining the church fill out an application and attend a “Church Vision Class” about the ministry’s goals and beliefs. This organization will file Form 1023 as a church.

What's the next step for your ministry?

Every ministry is different, and there is not a “one-size-fits-all” solution to classifying your ministry status. When you consider the guidelines above, you will be better armed to make the right decision about the legal foundation of your ministry.

Everyday at StartCHURCH, we help ministry leaders like yourself to verbalize the dream and vision that God has given them so that they can be correctly classified for tax-exempt and legal purposes.

If you have any questions as to how you are currently set up, or how you should be set up, please give us a call at 877-494-4655 and one of our knowledgable team members will be glad to serve you! You can also click on the link below for more information.

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