Growth Beyond the Four Walls of Your Church
By Raul Rivera
While I was sitting at my desk the other day, one of our team members handed me an approval letter from the IRS for one of our clients. Now, this is not totally uncommon because we receive approval letters on behalf of our clients on a near daily basis. But on this particular day, this specific approval letter was different. This approval letter was for a group exemption.
Perhaps you are wondering, “What’s the big deal about receiving this approval letter if receiving approval letters is not uncommon for the churches and ministries with whom you work?” Well, I am glad you asked.
Although we have helped, and continue to help, 1000’s of churches and ministries across the country to establish a solid legal foundation in order to protect the vision and dream that God has given them, this was actually the first church that we have helped to obtain group exemption from the IRS. It was an arduous and tedious process with the IRS, but our staff worked diligently to see it through to completion.
Holding that approval letter in my hand that day got me thinking about all of the churches and ministries we have worked with throughout the years. And I wondered to myself how many of those churches and ministries, today, could benefit by having a group exemption, but are simply unaware of what it is.
Therefore, I have decided to use this post to share with you what it means to obtain a group exemption. In this post we will examine what a group exemption is, how a group exemption operates, and how to obtain a group exemption recognition from the IRS.
What is group exemption?
Many pastors believe that once their church has been established then anything started after that can just be covered by the church. This is often referred to as “the church umbrella”. The misconception of “the church umbrella” was covered in a previous two-part blog series, and you can click here and here to read both of those.
The reality is that in order to “cover” other church plants or ministries under your church’s 501(c)(3) status, you must apply for what is known as group exemption. In short, an approved group exemption has the same effect as an approved individual exemption except that the group exemption applies to more than one organization. These organizations covered by a group exemption are known as subordinate organizations.
Now that we have a general idea of what a group exemption is, it is necessary to understand how the group exemption operates. To do this, we will take a look at the responsibilities of, and relationship between, the central organization and subordinate organizations.
How the group exemption works
The central organization
If your church is seeking to obtain a group exemption then your church will be considered the central organization. It is important to know that as the central organization, you must obtain your own 501(c)(3) status.
As the central organization, you may submit your request for group exemption at the same time you submit your tax-exempt application for the church. However, we suggest that you obtain the 501(c)(3) status for your church first and then move forward with the group exemption process. We find that this will help you cut out the stress of having to handle the paperwork for your church plus any subordinate organization(s).
It is important to note that although churches are not required to apply for 501(c)(3) recognition, under the procedures for a group ruling, a church must apply for recognition of its own 501(c)(3) status in order to be the central organization in a group ruling.
Your responsibility as the central organization is to essentially supervise or control the subordinate organizations. This can be done in a couple of ways, but is most commonly done through governing control. In other words, the subordinate organizations must submit to prescribed bylaws from the central organization.
The subordinate organization
Subordinate organizations typically have similar structures, purposes, and activities as the central organization. In addition, subordinate organizations must be:
- affiliated with the central organization,
- subject to the central organization’s general supervision or control, and
- exempt under the same paragraph of IRC 501(c), though not necessarily the paragraph under which the central organization is exempt.
In essence, all of the subordinate organizations must be classified under the same section of 501(c). For example, a central organization that is a church cannot include a holdings corporation as a subordinate organization since holdings corporations are classified under section 501(c)(2). However, a central organization that is a church can include organizations such as food banks, youth outreach centers, and schools as subordinate organizations since they are also classified under section 501(c)(3).
Another item to take note of regarding subordinate organizations is that, according to IRS Publication 557, all subordinate organizations must have an organizing document. To help meet this requirement, we suggest that each subordinate organization be incorporated in its own state. (To read about the benefits of incorporation, please click here.)
Next, we will take a look at what it takes to obtain group exemption status.
Obtaining group exemption status
Since your church most likely has its 501(c)(3) status, when applying for a group exemption status you will need to include the following:
- Form 8718,
- your employer identification number (EIN), and
- the date of your 501(c)(3) approval, as indicated on your federal determination letter (FDL).
Also, take note that if your church is applying for group exemption and has already received recognition from the IRS as a tax-exempt organization, it is not necessary to resend the documents that you initially submitted when applying for tax-exempt status. However, if there have been any changes or amendments to your church’s governing documents since its approval, you must include those with the application for group exemption.
When requesting group exemption, the central organization must submit information for the subordinates to be included in the group exemption letter. The information should be forwarded in a letter signed by the principle officer of the central organization, usually the president of the board, setting forth or including as attachments the following:
1. Information verifying that the subordinates:
- Are affiliated with the central organization at the close of its annual accounting period;
- Are subject to its general supervision or control;
- Are eligible to qualify for exemption under section 501(c), though not necessarily the same paragraph under which the central organization itself is exempt;
- Are not a private foundation if the application for group exemption letter involves section 501(c)(3);
- Are all on the same accounting period as the central organization if they are to be included in group returns; and
- Are organizations that have been formed within the 15-month period preceding the date of submission of the group exemption application if they are claiming section 501(c)(3) status and are subject to the requirements of section 508(a) and wish to be recognized as exempt from their dates of creation (a group exemption letter may be issued covering subordinates, one or more of which have not been organized within the 15-month period preceding the date of submission, if all subordinates are willing to be recognized as exempt only from the date of the application).
2. A detailed description of the purposes and activities of the subordinates, including the sources of receipts and the nature of expenditures.
3. A sample copy of a uniform governing instrument (such as bylaws) adopted by the subordinates.
4. An affirmation to the effect that to the best of the officer’s knowledge, the purposes and activities of the subordinates are as stated in the previous two points (2 & 3) above.
5. A statement that each of the subordinates has provided a written authorization to the central organization, signed by an authorized officer of the subordinate, agreeing to be included in the group exemption.
6. A list of subordinates to be included in the group exemption letter to which the IRS has issued an outstanding ruling or determination letter relating to exemption.
7. If the central organization is 501(c)(3), an affirmation to the effect that, to the best of the officer’s knowledge and belief, no subordinate to be included in the group exemption letter is a private foundation as defined in section 509(a).
8. If a subordinate organization that is a school claiming exemption under section 501(c)(3), then the information required by Revenue Ruling 71-447 and Revenue Procedure 75-50.
9. For any school affiliated with a church, the information to show that the provisions of Revenue Ruling 75-231 have been met.
10. A list of the names, mailing addresses, actual addresses if different, and EINs of subordinates to be included in the group exemption letter.
Once you have everything complied together and you have dotted all of your “i’s” and crossed all of your “t’s”, you will be ready to send your group exemption application to the IRS, along with the user fee, as instructed on Form 8718.
When you receive your recognition of group exemption from the IRS, there are things to be mindful of in order to maintain your group status. Because of the extent of those steps, that information will be included in a future blog post. In the meantime, if you have further questions about obtaining group exemption, please call our office at 770-638-3444.
Where to go from here . . .
Whether or not your church is in a position to apply for group exemption, it is important that you determine where your church is today. Perhaps your church has yet to take any legal steps. You know there are steps that your church needs to take, but you are not quite sure where to begin.
I want to encourage you to join us at one of our Ultimate Church Structure Conferences as a part of the first steps for your church. Our one-day conferences are intended to educate and empower pastors and church leaders to lead and navigate their churches and ministries through the legal landscape of the 21st century. Register today! I promise you will not regret it!