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  • Understanding IRS Tax-Exempt Status for Churches: A Comprehensive Overview

    tax exempt

    Tax-exempt status is crucial for a church. Congregants and others want to be able to take a tax deduction for money that they donate. In many cases, congregants would give more than they otherwise would have because they can save on their taxes. IRS law aims to encourage non-profit organizations and make it easier to raise the money they need to operate. However, with any benefit, some rules must be followed to maintain it. Churches need to know the rules that apply because they can get into trouble for noncompliance.

    A tax-exempt church is a 501(c)(3) organization. This is named for the federal tax code section related to non-profit organizations. 501(c)(3) organizations are limited to those that serve specific purposes. Religious organizations are a permitted purpose of a 501(c)(3) organization.

    Before a church can apply for 501(c)(3) status, it must have certain documents, such as articles of incorporation. The church would also need to submit its financial information on Form 1023 or 1023-EZ, depending on the size of the church.

    Churches need to apply for 501(c)(3) status by filling out a form and paying an application fee. First, they would need to register the organization with the state. The IRS would need to approve them as a tax-exempt organization. Then, the church must keep its tax-exempt status by observing IRS rules.

    What Churches Must Do After They Have Been Approved for 501(c)(3) Status

    Once a church is approved for 501(c)(3) status, it must keep records that prove it complied with the rules. Generally, the church should keep records of contributions and expenses, separating taxable from non-taxable income.

    The IRS may audit the organization at some point, and the church may need to prove that it should keep its tax-exempt status. The church must also file a Form 990 with the IRS annually. This form is the church’s annual return. The church may be penalized if it fails to file Form 990 or file it on time.

    Limitations on a Non-Profit Organization’s Activities

    There are limitations that the church must observe to keep its 501(c)(3) status. First, the organization cannot accrue profit for the benefit of a private party. Then, it must avoid substantial engagement in certain activities that include:

    • Lobbying
    • Propaganda
    • Other legislative activities

    How to Maintain 501(c)(3) Compliance

    To comply with 501(c)(3) rules, the church should have policies and procedures that govern its activities. Key employees and representatives should be trained in what they should and should not do in handling church business.

    The stakes for continued 501(c)(3) compliance could not be higher. If a church loses its tax-exempt status, it may not get the contributions it relies on to operate. The church may then also need to pay income taxes.

    The Importance of a Church Lawyer

    Churches can greatly benefit from working with an attorney on tax-exempt issues. A lawyer could give general advice on compliance with IRS rules that could help the church obtain and keep its tax-exempt status. Then, an attorney could respond to any questions a church would have about specific situations. If a church is under scrutiny by the IRS, an attorney can represent and defend the organization, dealing with the government on the religious institution’s behalf.

    Contact Our Virginia Beach Church Lawyers at Anchor Legal Group, PLLC for Help With Maintaining a Tax-Exempt Status

    Our Virginia Beach church lawyers at Anchor Legal Group, PLLC work with religious organizations on various legal issues, including 501(c)(3) compliance. You can get legal help by scheduling a consultation with one of our attorneys. Call 757-LAW-0000 or contact us online today. Located in Virginia Beach, we help clients in Chesapeake, Norfolk, Suffolk, Portsmouth, Newport News, Hampton, Williamsburg, and Eastern Shore, Virginia.