501(c)(3) – To File or Not to File


One of the first decisions every pastor has to make when planting a church is whether or not to be a 501(c)(3), and it’s important to understand what it means for the church. I want to add clarity to this discussion and share why it can be beneficial to have the designation of a 501(c)(3) for your church.

First of all, let’s look at the state of the law. The church has (what has been historically) a rock solid exemption from paying tax as a “for profit company” on all funds related to the ministry of their faith. Now the word “church” is not found anywhere in the Internal Revenue Code (IRC) or tax code, but the exemption is there, and it means a church is not required to incorporate or file for a 501(c)(3) in order for donations from its members to be considered charitable. This means all gifts given to the church are deductible for the members, and the church will not be taxed on these donations. Therefore, right now as the law stands, your church does not need to incorporate or file for the 501(c)(3) deduction to operated as a nonprofit.

So why should your church incorporate? In the previous blog post, I shared reasons why your church should incorporate and gave some examples of how it can add a layer of protection for the church and pastor of the church. If you missed the blog post on why your church needs to incorporate, you can read it here.

Let’s assume you are willing to incorporate your church – you first want to make sure you have someone who knows what they are doing to help form your state-specific nonprofit corporation. In forming the nonprofit, there are several pitfalls that can be avoided when you know what you are trying to accomplish. One such pitfall is the language used in the nonprofit filing. It must be specific if you are going to file for your 501(c)(3) with the IRS.

Two things to make clear:

1. There are two separate filings needed here. One is to incorporate your church in the state where you are located. One of the basic requirements for receiving your 501(c)(3) designation is that you have a nonprofit corporation already established.

2. the next filing is with the IRS, this is a form 1023, this form contains the information that allows the IRS to determine your eligibility for the 501(c)(3) designation.

Now, when someone says they have a 501(c)(3), they are saying that the IRS has given them a determination letter which is only applicable to that entity and states that they have been “determined” by the IRS to meet the minimum requirements to be given the designation of a 501(c)(3). In practicality, you received a signed letter that simply states your organization has been determined to qualify for 501(c)(3) status. (When you receive this letter, it is very underwhelming. It is one page and has hardly anything on it, but it is very important that you keep this for your records.)

So why go to all the trouble of filling out all the paperwork and spending the money to receive this underwhelming letter from the IRS when the average member who is tithing is not going to require anything special and honestly would not know the difference in an unincorporated church and a church who was incorporated and had their 501(c)(3)? Those members will still give to your church because they believe that tithing is the proper way to respond to the instruction contained in the Bible – in short, the tax deduction does not matter.

One reason to have the 501(c)(3) determination is to provide clarity to the big donors who do care, or more likely have advisors who are not as familiar with the law making sure they are covered when making large donations. Most tax planners are worried about potential audit, and they want to make sure any large deduction is going to count because they are afraid of interest and penalties. Now the reality is that if they have a giving statement from the church, they will be audit proof as far as their giving goes, even if it were an unincorporated church.

Another reason is to have your church listed on the nonprofit or charitable giving services. This allows people to check and see that you are listed as a 501(c)(3). These websites can help when soliciting donations or gifts-in-kind from businesses or others charities. I know of one church that needed this designation so that a Fortune 500 company could donate some of their sample goods for the church to give to the less fortunate. Having this designation helps you to check the box on some of these company’s polices and procedures when making donations.

I hope you have seen that despite the paperwork involved and the upfront cost, it is worth your church pursuing its 501(c)(3) designation. You can make the process easier by finding an knowledgeable attorney who has experience forming 501(c)(3)’s for churches and ministries. If you need help, click here for a special offer to form your 501(c)(3).

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