Churches receive special tax treatment from the IRS and the Commonwealth of Virginia. Not only are they exempt from income tax, but they also get numerous other tax breaks. Before churches can receive this favorable treatment, they must be properly incorporated and meet a number of IRS tests.
There are two primary things that you must do to form a tax-exempt church in the eyes of the IRS:
- Incorporate the church as you would any other nonprofit organization at the state level
- Be part of a traditionally recognized religious denomination or meet the specific test that the IRS uses to determine whether a religious organization qualifies as a church.
Thus, church formation is a combination of non-profit/corporate law and religious organization law. There are laws that apply on both the state and federal levels.
How to Incorporate A Church Under Virginia Law
Virginia law requires that you follow numerous steps to incorporate any non-profit organization in the state. Here are some of the steps you would need to take to incorporate a non-profit organization under Virginia law:
- Appoint an initial board of directors
- Draft and file initial articles of incorporation with the state
- Establish governance policies and documents, including bylaws
In addition, you would need to obtain an Employer Identification Number from the IRS.
The church’s structure and governance should be tailored to its own circumstances. The choices that a church makes in the incorporation phase can determine whether the organization can be soundly and properly run in the future. Corporate governance matters, both for tax purposes and the church’s reputation. In addition, churches need a level of transparency with their members given the fact that they rely on donations. An experienced attorney can help you draft the necessary documents to begin incorporating your church.
Qualifying for IRS Tax-Exempt Status
There is no legal requirement for a church to formally obtain tax-exempt status, but it is often in the church’s best interest to do so. In other words, a church does not need to apply to receive tax-exempt status, but many choose to do so nonetheless. One major reason is that donations to the church then become tax-deductible for the person making it.
Besides being tax-exempt, recognition as a church gives several benefits beyond what a mere religious institution may have. First, the IRS must follow specific rules when it audits a church. Second, the church is not required to file an annual Form 990.
At the same time, not every religious institution will qualify for church status with the IRS. Whether an institution is a church depends on the facts and circumstances of each situation.
If the church is already a part of a recognized religion in the eyes of the IRS, there is no further inquiry necessary. To be clear, the church must be a part of a “traditionally recognized religious denomination.”
If the church is not part of a traditionally recognized religious denomination, the IRS has a detailed set of questions that it may ask to determine whether a religious institution qualifies as a church. In all, there are 14 different elements that the IRS may look at, but you do not need to meet every single one of the criteria. Many of these questions will relate to the religious life of the church and its own history. The IRS would look to the doctrines of the church and even the means of training ministers.
Note that there are certain things that a church can do that could jeopardize its tax-exempt status in the eyes of the IRS. For example, when a church engages in political activity, the IRS could revoke its tax-exempt status. Thus, keeping tax-exempt status is not always automatic, and the IRS could scrutinize a church’s financial activities.
Our Virginia Beach church lawyers at Anchor Legal Group, PLLC work with religious organizations, helping with incorporation, governance, and tax-related issues. To schedule an initial consultation, you can send us a message online or call us today at (757) LAW-0000. Located in Virginia Beach, we serve clients in Chesapeake, Norfolk, Suffolk, Portsmouth, Newport News, Hampton, and Eastern Shore, Virginia.