What is a Church? What is a 501(c)3?
Tax-Exempt Status for Churches
There is much discussion about the benefits of acquiring a 501(c)3 status if you are a branch of Oklevueha Native American Church. Retaining our tax-exempt status is important, and often we need to extend that non-profit status to other parts of our spiritual branch.
Oklevueha Native American Church is considered a church by the IRS. We do not need to apply for a 501(c)3 exemption, as we meet the qualifications established to define a church. The issue of establishing definitions for a church has big implications. Institutions considered churches are granted tax-exempt status under Section 501(c)(3) of the Tax Code. This is an automatic status, assuming the church passes several tests of authenticity.
Common definitions of the word “church” refer to the religious entity or organization, not just the building itself. The definition becomes more complicated when considering each religious group’s own definition of what constitutes a church.
Certain characteristics are generally attributed to churches. These attributes of a church have been developed by the IRS and by court decisions. They include:
- Distinct legal existence
- Recognized creed and form of worship
- Definite and distinct ecclesiastical government
- Formal code of doctrine and discipline
- Distinct religious history
- Membership not associated with any other church or denomination
- Organization of ordained ministers
- Ordained ministers selected after completing prescribed courses of study
- Literature of its own
- Established places of worship
- Regular congregations
- Regular religious services
- Sunday schools for the religious instruction of the young
- Schools for the preparation of its members
A church need not have all these attributes to be considered tax-exempt by the IRS.
So why would a branch of ONAC require a 501(c)3 status if they aren’t required to?
It’s common for churches to still apply for 501(c)(3) status, even though they aren’t legally required to do so. There are a few reasons for this:
- Having 501(c)(3) status assures your congregation and donors that the church is recognized officially by the IRS as legitimate and tax-exempt, thus guaranteeing their donations and tithes will be tax deductible.
- 501c3 status increases the transparency of the organization, as the church will then be required to file a tax return (called IRS form 990) each year. Those forms are available to the public, again, ensuring donors know that their money is being used in a charitable way. For churches who provide programming like missions work or children’s programs, this transparency can be a great way to let donors know that their contributions are going to a worthy cause.
- Another factor is that 501c3 organizations are given a variety of discounts and benefits. Many companies have programs that discount their services or products for established nonprofits like churches but require 501c3 status to ensure the legitimacy of the organization. The US Postal Service also offers discounted rates for mailing and postage for established 501c3 organizations.
- Some states provide additional tax exemptions for established 501c3 organizations like exemption from state sales tax or state employment tax. These tax exemptions can help churches spend more of their funding on their religious services and programs, rather than on taxes.
Churches who operate under a 501(c)3 status are required to file tax documents to the IRS. Filing tax documents each year in no way nullifies a church’s tax-exempt status, but the IRS requires filing each year.
Churches have always been exempt from federal income taxes. But through the years, several misconceptions have arisen about their tax-exempt status. Here are the five myths we hear most often—with the facts.
MYTH 1: Churches are not subject to section 501(c)(3) of the federal Tax Code.
The truth is all churches are subject to section 501(c)(3) of the federal Tax Code whether they apply for recognition as a 501(c)(3) organization or not. Churches are not required to apply for recognition from the IRS, but that does not remove them from the Tax Code requirements.
MYTH 2: Churches that do not apply to the IRS for 501(c)(3) recognition are free from government regulation.
The truth is all churches must abide by the federal Tax Code regardless of whether they have applied for IRS recognition of tax-exempt status. This issue has been litigated, and federal courts have clearly held that churches are subject to section 501(c)(3). The Tax Code was written with the assumption that all income is taxable unless it is exempted by the Code. Thus, even if a church does not apply for recognition of tax-exempt status, it is still considered subject to the federal Tax Code. The good news is that churches are automatically exempt from income taxes by section 501(c)(3), but this also means churches are subject to the requirements of section 501(c)(3).
MYTH 3: Churches that do not incorporate are not subject to regulation by the IRS.
Some mistakenly believe that if their church never incorporated, then the IRS (and any other state government or federal agency) cannot regulate or control their church. A similar myth is that if a church un-incorporates, creates a “corporation sole,” or some other unique corporate status, that it will remove itself from government control.
The truth is a church’s corporate status has no effect on its regulation by the IRS under the Tax Code. The IRS regulates both incorporated and unincorporated organizations. Just because a church is not incorporated does not mean it gets a free pass from federal tax laws and regulations. The same is true of other federal, state, and local laws and regulations.
MYTH 4: Churches that incorporate or apply to the IRS for tax exemption give up their freedom.
The truth is churches do not give up their constitutional rights by incorporating or applying for a 501(c)(3) letter from the IRS. Because churches make no “exchange” for a 501(c)(3) letter or to incorporate, they retain their constitutional rights no matter what corporate form or tax letters they receive from the government.
That is not to say that the federal government never overreaches when it comes to churches. The Johnson Amendment in section 501(c)(3) of the Tax Code restricts what a pastor can preach from the pulpit on the issue of candidates in an election. Every church is subject to the Johnson Amendment regardless of whether it incorporates, seeks recognition as a church, or attempts to take on a unique corporate form to prevent government control.
MYTH 5: Churches should fear the IRS as a powerful agency that can wreak havoc on them.
Many churches fear the IRS because they have heard stories of abuses of power, or perhaps they know someone who went through a particularly painful audit.
The truth is the IRS is subject to legal restrictions that curtail its power over churches. For instance, Congress passed the Church Audit Procedures Act in 1984, which requires the IRS to abide by significant restrictions when deciding to audit a church and how to conduct the audit. The IRS is also constrained by the unique status churches have under the federal Tax Code. Churches are considered automatically exempt from income taxes, and this unique status provides beneficial protection for churches.