In the realm of faith-based organizations, church and religious non-profits hold a unique position as both the standard-bearers of Christain Faith and morals while also being the hands and feet of Jesus to their communities. While the primary focus remains on serving God’s Kingdom, it’s crucial for these organizations to remain compliant with the Internal Revenue Service (IRS) regulations.
Be subject for the Lord’s sake to every human institution, whether it be to the emperor as supreme, or to governors as sent by him to punish those who do evil and to praise those who do good. For this is the will of God, that by doing good you should put to silence the ignorance of foolish people. Live as people who are free, not using your freedom as a cover-up for evil, but living as servants of God. Honor everyone. Love the brotherhood. Fear God. Honor the emperor.
1 Peter 2:13-17
“Render to ceasar what is ceasar’s, and ceasar will leave you alone.”
Rev. Bill Bailey
To help Christian organizations exist above reproach, let’s explore the primary IRS compliance considerations, ensuring that their dedication to their mission is upheld within the boundaries of the law.
Non-Profit Status Determination
Federal (IRS)
Churches that meet the requirements of IRC Section 501(c)(3) are automatically considered tax exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS. NOTE: This does not apply at the State level. Research your specific State’s requirements as they vary by State.
Even with the automatic exemption, it is our conviction that a church is placed in the best possible defensible position by properly securing tax-exempt status under section 501(c)(3) of the Internal Revenue Code. This is mandatory for non-church or para-church religious organizations. To qualify, they must demonstrate that they are organized and operated exclusively for religious, educational, charitable, or other exempt purposes.
The application process for tax-exempt status involves submitting Form 1023 or Form 1023-EZ, depending on the organization’s size and financial activities. Form 1023-EZ is a streamlined version suitable for smaller organizations with gross receipts below $50,000 and total assets below $250,000. For larger churches, Form 1023 provides a comprehensive overview of the organization’s activities, finances, and governance.
State
Beyond federal recognition, non-profit organizations must also adhere to state-level regulations. State governments require non-profit entities to register and adhere to specific reporting and compliance requirements. Most states require non-profits to register with a state agency responsible for overseeing charitable organizations. This may involve filing forms, providing organizational details, and paying registration fees.
Further, many states mandate that non-profit organizations file annual reports that provide updates on their activities, financial information, and leadership. These reports are often submitted to the same state agency responsible for registration.
Organizational Structure and Documentation
When applying for tax-exempt status, Christian churches, and other ministry organizations should provide detailed documentation that highlights their organizational structure and activities. This includes information about their religious beliefs, practices, and doctrines that distinguish them from secular organizations. Christian churches should outline their governing structure, leadership hierarchy, and any affiliations with larger denominations or religious bodies.
Church Bylaws
Christian churches and non-church ministries typically have bylaws that outline the framework of their organizational structure, governance, and decision-making processes. These documents detail how the church is governed, the roles and responsibilities of leadership positions, and the procedures for making important decisions. Bylaws demonstrate that the church operates in an organized and transparent manner.
Leadership Hierarchy
Christian churches are often led by pastors, ministers, priests, or other clergy members, along with lay leaders and committees. When applying for tax-exempt status, it’s important to provide a clear overview of the church’s leadership hierarchy. This includes identifying key leadership roles, their responsibilities, and how decisions are made within the organization.
Statement of Faith and Religious Beliefs
A statement of faith is a declaration of the church’s or organization’s core religious beliefs and principles. This document explains what the organization stands for, its theological doctrines, and its commitment to a particular faith tradition. This statement helps establish the church’s religious purpose and distinguishes it from secular organizations. It also can act as a legally defensible document.
Heaven & Earth can assist in developing these documents – contact us to learn more.
Financial Accountability
Christian churches and non-church ministries seeking tax-exempt status should establish robust financial accountability measures. This includes maintaining accurate financial records, budgets, and accounting practices. Transparency in financial matters not only instills confidence in potential donors but also provides a clear picture of how the church manages its resources to fulfill its mission. Proper record-keeping of contributions is essential for tax-exempt status. The IRS requires written acknowledgments for donations exceeding $250, detailing the date, amount, description of the contribution, and whether any goods or services were provided in return.
Accurate Financial Records
Maintaining accurate and well-organized financial records is the bedrock of financial accountability. These records include income and expense statements, bank statements, receipts, and documentation of donations. Accurate records provide a clear picture of the church or other organizations’ financial health and activities, enabling informed decision-making.
Separation of Funds
To prevent commingling of funds, churches should maintain separate accounts for different purposes, such as general operating expenses, charitable activities, and building maintenance. This separation ensures that resources are appropriately allocated and tracked.
While churches are generally exempt from paying taxes on income generated from their core religious activities, they may be subject to UBIT if they engage in commercial activities unrelated to their primary purpose. It’s crucial to carefully assess income sources and consult tax professionals to determine if UBIT applies.
Annual Reporting
Many states require non-profit organizations, including churches, to file annual reports that detail financial information and activities. Adhering to these reporting obligations ensures compliance with state regulations and provides transparency to the public.
Form 990 Filing Requirements
Most tax-exempt organizations, including religious non-profits, are required to file Form 990 annually. This form provides the IRS and the public with information about the organization’s mission, programs, and finances. Religious non-profits with gross receipts below $50,000 can file the simplified Form 990-N (e-Postcard), while larger organizations must file Form 990 or Form 990-EZ.
Ministerial Housing Allowance
Clergy members often receive housing allowances that can be excluded from their taxable income. However, specific rules and limits apply. Proper documentation and adherence to IRS guidelines are essential to avoid potential disputes.
Heaven & Earth can help your church or para-church ministry with these compliance-related topics. Contact us to get started!