"They Got Approved!"

By Raul Rivera

As I walked in the office a while back, 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 from the IRS on behalf of our clients on a near daily basis. On this particular day, this specific approval letter was different. This approval letter was for a church group exemption.

Holding that approval letter in my hand that day got me thinking about all of the churches and ministries we have worked with and served throughout the years. I asked myself, “How many of those churches and ministries could benefit from having a group exemption but are simply unaware of what it is?”

Thus, I wanted to write this post in order to share with you what it means for your church to obtain a group exemption status from the IRS. In this post you will learn about what group exemption is, how a group exemption operates, and how you can obtain a group exemption recognition from the IRS if that is what God is directing you to do.

I realize some of you may be thinking this particular post does not apply to you and your church at this time. Perhaps this is not what God is leading your church to do at this time or maybe your church has yet to take any legal steps. Either way, before you go, I want to give you the opportunity to do one of two things (or both if you want):

1. If you have not been able to do so thus far, register for one of our one day conferences. You can register and find out more about this conference by clicking here.
2. If your church has yet to take any legal steps and you are wanting to read and learn more about what that looks like for you, then you may be interested in reading “Does a Church Need to be 501(c)(3) Approved?”

What is group exemption?

Many pastors believe that once their church has been established, then any ministry started afterward can just be covered by their 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. 

(Recommended reading: “Can Churches Share Their Tax-Exempt Status? Part 1” and “Can Churches Share Their Tax-Exempt Status? Part 2”

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 between organizations

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 though 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 it 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 the following:

1. affiliated with the central organization;
2. subject to the central organization’s general supervision or control; and
3. eligible for exemption under IRC 501(c), though not necessarily the same paragraph under which the central organization is exempt.

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, it is recommended that each subordinate organization be incorporated in its own state.

(Recommended reading: “How to Start a Church the Right Way”)

Next, we will 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:

1. Form 8718;
2. your employer identification number (EIN); and
3. 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. Certain information verifying that the subordinates are affiliated with the central organization. (For specific details see IRS Publication 557)
2. A detailed description of the purposes and activities of the subordinate organizations.
3. A sample copy of a governing document (such as bylaws) adopted by the subordinate organizations.
4. An affirmation to the effect that to the best of the officer’s knowledge, the purposes and activities of the subordinate organizations are as stated in the previous two points (2 & 3) above.
5. A statement that each of the subordinate organizations 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 acknowledging that subordinate organizations will be similar to the central organization as it pertains to how they are classified for tax purposes.
8. If a subordinate organization that is a school claiming exemption under section 501(c)(3), then information required by Revenue Ruling 71-447 and Revenue Procedure 75-50 needs to be included.
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 compiled 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.

I realize this is a lot to take in, so if you have further questions about obtaining group exemption, please call our office at 877-494-4655.

What is the next step for your church?

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 steps in structuring its legal foundation. You know there are steps that your church needs to take, but you are not quite sure where to begin.

Well, I encourage you to take that first step for your church or ministry by joining us at one of our Ultimate Church Structure Conferences. 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!

Handpicked articles for you:

• “3 Positions Every Church Board Must Fill”
• “Why Some Pastors Compromise Their Sermons”
• “Do You Really Know What is in Your Bylaws?”

---