Being tax-exempt is a question of profound importance to the church. Many Christians mistakenly believe that a church is tax-exempt simply because it has the word "church" in its title. Others believe that the federal government is prohibited from taxing churches by the U.S. Constitution. Both of these beliefs are in error and can inadvertently lead to a church's loss of tax-exempt status. The government is actively looking for ways to increase its tax revenues, and one way to do so is to find those tax-exempt organizations that are not abiding by the requirements of the law.
Tax exemption is an extremely important benefit that should be safeguarded. In almost every instance, the loss of federal tax-exempt status by a church means the extinction of that church! Not only will the church have to begin paying federal income taxes, in most instances it will also have to begin paying property taxes. In addition, the church will lose other important benefits, such as the ability to give receipts for charitable contributions, the added protection against certain IRS audit procedures, and the exemption from filing IRS Form 990. For these reasons it is most important that churches understand why they are tax-exempt, so that they may safeguard their exemption from inadvertent loss.
Internal Revenue Code section 501(c)(3) provides for the tax exemption of certain organizations, including churches and schools, if they meet seven criteria. These criteria are easy for the church to meet, if the church knows and understands them.
1. THE ORGANIZATION MUST BE A FORMAL ORGANIZATION.This means the church must organize as a trust, an unincorporated association, or a corporation; and here must be a written document adopted by at least three persons not related to each other by blood or marriage. This written document is generally called the church's constitution and bylaws. This is a common cause for the loss of tax-exempt status and it is the easiest to avoid. If your church does not have this written document, I urge you to adopt one immediately.
2. THE ORGANIZATION MUST BE ORGANIZED EXCLUSIVELY FOR EXEMPT PURPOSES.The written document adopted by the organization must specifically state that the organization will engage in "religious, charitable, or/and educational purposes," and that it will not engage in nonexempt purposes. We recommend that the church specifically use the words "religious, charitable or/and educational" in its document. These three words accurately describe the mission of the New Testament church.
3. THE ORGANIZATION MUST BE OPERATED EXCLUSIVELY FOR EXEMPT PURPOSES.This means that the church may only engage in activities that are in conformity with its tax-exempt purpose.
4. NONE OF THE ORGANIZATION'S NET EARNINGS MAY INURE TO THE BENEFIT OF ANY PRIVATE INDIVIDUAL.The church's written document must include a dissolution clause which requires, in the event of dissolution, that its assets be distributed to other tax-exempt organizations and not to individuals. This is another common area of trouble for tax-exempt organizations.
5. THE ORGANIZATION MAY NOT ENGAGE, TO A SUBSTANTIAL DEGREE, IN ATTEMPTS TO INFLUENCE LEGISLATION.The church, as with any other exempt organization under section 501(c)(3), may only engage in lobbying activities to an insubstantial degree, which has been defined as no more than five percent (5%) of the organization's time and/or money during a calendar year.
6. HE ORGANIZATION MAY NOT PARTICIPATE IN POLITICAL CAMPAIGNS.This is an absolute bar. There must be absolutely no partisan involvement in political campaigns. The IRS is now watching this area very closely, especially the distribution of voter guides by tax-exempt organizations. While a church may distribute these guides, they must meet certain guidelines. For example, the guide must cover a broad range of issues and not just those which are of interest to the church, it must accurately describe a candidate's position and voting record, and it must be distributed at least one time during the year other than at election time.
7. THE ORGANIZATION MUST NOT ENGAGE IN ILLEGAL ACTIVITY OR ACTIVITY CONTRARY TO PUBLIC POLICY.Currently, this means that the church may not engage in racial discrimination or advocate the violent overthrow of the federal government. The ability of the government to revoke a ministry's tax-exempt status because of racial discrimination was upheld in the 1983 U.S. Supreme Court case of Bob Jones University v. United States. While this particular provision of the tax code is not presently giving churches and other ministries any difficulty, I believe it will be the major area of contention should same sex marriage ever be legally recognized. If this practice is ever legalized, churches that refuse to recognize these marriages could run afoul of this public policy requirement. Please be in prayer over this issue.
As long as a church meets these seven requirements set forth in section 501(c)(3), it will be presumed to be tax-exempt by the federal government. In addition, churches are specifically excluded under section 508 of the IRS Code from the requirement to file a Form 1023, Application for Recognition of Exemption. This is a benefit only enjoyed by churches and their integrated auxiliaries. All other tax-exempt organizations, including independent Christian schools, are required to file a Form 1023 in order to be recognized as tax-exempt.
As local, state and federal governments determine they need more money than can be raised under the current tax provisions, tax exemption will be scrutinized to an even greater degree. Those churches, and Christian schools, which do not ensure strict compliance with the requirements for tax exemption, will find their ministries in jeopardy. I urge you to protect your ministry by first knowing what is required for tax-exempt status, and then by following the requirements. By doing so, you will safeguard the tax-exempt status of your ministry so that others may be reached with the Gospel of Jesus Christ.
Your legal missionary,
David C. Gibbs, Jr.