Skip to main content

Advantages for a Church to Pursue Formal Recognition of IRC Section 501(c)(3) Status

Question:

Our church is looking to apply for 501(c)(3) status. What are the advantages and disadvantages of pursuing formal recognition as a 501(c)(3) organization?

Answer:

To be tax-exempt under Internal Revenue Code § 501(c)(3), organizations (e.g., churches) must be organized and operated exclusively for exempt purposes set forth in the IRC. Additionally, a 501(c)(3) organization must not be organized or operated for the benefit of private interests (referred to as "private inurement").

Churches are automatically classified as IRC § 501(c)(3) entities regardless whether they have been formally recognized by the IRS. Yet, there are reasons to pursue formal recognition. Those that do receive this recognition receive from the IRS a Tax Determination Letter.

Advantages:

1. Church schools that wish to apply for grants will likely need to provide a Tax Determination Letter since foundations do not want to disseminate funds only to find that they were contributed to disqualified charities.

2. Application for preferential U.S. Postal Service bulk mailing permits may require a copy of a Tax Determination Letter.

3. Donor Advised Funds (DAFs) are most often sponsored by investment firms that allow donors to make contributions that are later directed to public charities. Many of these firms require that a Tax Determination Letter be available before disbursement is approved. With the increased use of DAFs, it will likely be a growing expectation that a tax determination letter be provided before disbursement (e.g., Fidelity). IRS Publication 526 provides additional information on DAFs.

4. Some church members may be employed by business firms that will match their personal charitable contributions, if a Tax Determination Letter can be provided.

5. Formal recognition of a church does not trigger the annual Form 990 filing requirements that most tax-exempt organizations other than churches must fulfill.

6. Listing in the IRS Tax-Exempt Organization Search (TEOS) gives donors quick confirmation of the exempt status of a church.

Disadvantages:

1. The Form 1023 application is lengthy (26 pages) and cites IRC Sections with often little lay-friendly terminology.

2. A $600 user fee must accompany the application (2020 rate per IRB 2020-1, Appendix A).

3. Form 1023 requires many disclosures which become "open for public inspection" (e.g., organizational structure, Articles of Incorporation, Constitution, employee compensation, officers of the church, presence or absence of policies (e.g., conflict of interest)).

Source: Exemption Requirements - 501(c)(3) Organizations



Comments

Post a Comment

Popular posts from this blog

Review: Form 1099 Payments to 501(c)(3) Organizations

Question: A church rented space from another church last year. Should it request a completed Form W-9 and issue Form 1099-MISC? Answer: Payments from one 501(c)(3) organization to another 501(c)(3) organization are not subject to Form 1099-MISC reporting. The IRS Instructions for Form 1099-MISC state that "payments to a tax-exempt organization" are exempt from reporting a Form 1099-MISC.  The following are typical examples of payments of $600 or more by a church which are subject to reporting a Form 1099-MISC: Rent paid to an individual (non-corporation) Payments for services rendered by individuals who are not employees (e.g. janitorial service, facilities, snow removal, guest speakers) Support sent directly to missionaries

Debits and Credits for Designated Gifts

Question: A church is setting up QuickBooks for its accounting, but its personnel have little experience with fund accounting. What are the entries for the receipt and disbursement of designated gifts and the opening balances? Answer: We recommend that most churches that do not need to present financial statements in accordance with Generally Accepted Accounting Principles (GAAP) observe the following steps. Even those churches that do report using GAAP can employ these methods but must make some adjustments when preparing their financial statements. What we will demonstrate relates to what most churches call "designated gifts" (CPAs call these  Temporarily Restricted  gifts). These are gifts that donors contribute with the intention that the church will spend the funds as they direct. Most churches do not receive "endowment gifts" in which donors prohibit the expenditure of the core gift (CPAs call these  Permanently Restricted  gifts). Only earnings on the subsequ

Rental of a Church Parsonage to a Non-Minister

Question: A church owns a parsonage, but the pastor does not use it as he owns his own home. The church rents the parsonage to a tenant other than a minister or employee of the church. Will the church be responsible for paying income tax on these monies as Unrelated Business Income (filing a Form 990-T) even if the money is used to carry on the business of the church? Answer: Whether the money is used for church purposes is irrelevant.  IRS Publication 598  states: "If an exempt organization regularly carries on a trade or business not substantially related to its exempt purpose, except that it provides funds to carry out that purpose, the organization is subject to tax on its income from that unrelated trade or business." Fortunately, in the case of rental income from real property, such income is "excluded in computing unrelated business taxable income" (Publication 598). Caution: see content below regarding debt-financed property.  However, a second concern not a