In recognition of their first-amendment rights, as well as their general importance to American culture, the U.S. government has enacted special tax laws that apply to churches and other religious organizations. Specifically, these entities are typically exempt from having to pay income tax and, likewise, are usually able to receive tax-exempt contributions.
Yet obtaining this tax-exempt status is not always a straightforward process. When first establishing themselves, religious organizations must be careful to meet a broad range of criteria to ensure they comply with federal law. In many cases, faith leaders have found it beneficial to obtain qualified legal advice when pursuing tax benefits.
What criteria must religious organizations meet?
Given the sheer number of religions practiced in America – there are hundreds – it has been impossible for the government to define concretely which organizations do and do not qualify as tax-exempt. Nevertheless, the IRS has set out a number of qualifications that faith-based entities must meet:
- An organization’s purposes and activities must be religious and not violate the law or fundamental public policy
- An organization may not intervene in political campaigns nor attempt to unduly influence legislation
- No individual or shareholder may benefit directly from the organization’s net earnings
Likewise, though no formal definition of the term church is found in the Internal Revenue Code, the IRS mandates that churches and religious groups adhere to a number of conventions. These vary from case to case, but may include having its own literature, a distinct religious history, a formal code of doctrine, regular services, a regular congregation, and similar considerations. The IRS generally uses a combination of these characteristics, along with other facts and circumstances, to determine whether an organization is considered a church for federal tax purposes. See Publication 1828.
How to apply for tax-exempt status
Churches that meet all the government’s requirements do not need to formally apply for exempt status. However, many organizations choose to do so anyway. IRS recognition provides assurance for faith leaders, organization members, and congregants that they will receive tax-exemptions and that contributions will be tax-deductible.
Petitioners must use Form 1023; smaller religious organizations may be eligible to use Form 1021-EZ, which streamlines the process somewhat. There is a nominal (and non-refundable) fee that applies to all applications.
Are there exemptions to the exemptions?
Some income may not qualify for tax exemption. For instance, if a religious organization operates an independent business that generates a profit, it may be subject to traditional taxes.
To learn more, it may be advisable to speak with an experienced and knowledgeable attorney who can guide you through every step of the process.