Doing a search about church formation will often lead to confusion about whether a church should ever even apply for 501(c)(3) status. Opponents argue that doing so places the church under government control, and that being a 508(c)(1)(A) church is a better category because it provides fewer restrictions and greater freedom of speech. They believe that by not being a 501(c)(3) entity, the restrictions on political activity no longer apply.
Relying on these assertions is what can get churches in trouble.
What is a 508(c)(1)(A), and how do I apply?
The most important thing to mention is that you do not apply to become a 508(c)(1)(A) church. There is no application and no official determination.
26 U.S. Code § 508 requires nonprofits to notify the IRS that they are applying for recognition of tax exemption. This is done by filing Form 1023, the application for tax exemption. The Code then further states, under Section 508(c)(1)(A), that churches have a mandatory exemption from the filing requirement.
This does not create a whole separate type of entity or tax exemption. It is exclusively an exemption from the filing requirement to become a 501(c)(3) church.
In other words, Section 508(c)(1)(A) simply means the church does not have to ask first. A church that never files anything is still a 501(c)(3) organization, and is still bound by every 501(c)(3) requirement.
What are the 501(c)(3) restrictions on churches?
Because the church is a 501(c)(3) organization, it is subject to all of the following rules even if it never officially applies for 501(c)(3) status with the IRS:
- No political campaign intervention. A church may not support or oppose candidates for public office. This is the rule most often claimed to be avoidable through “508 status.” It is not true.
- No substantial lobbying. Attempting to influence legislation may not be a substantial part of activities.
- No private inurement or private benefit. Earnings may not benefit insiders. The pastor, officers and directors cannot receive any private benefit, including a percentage of the church’s revenue. Reasonable compensation for actual services is fine; using the church as a personal purse is not.
- Exclusively exempt purposes. The organization must be organized and operated exclusively for religious or other exempt purposes.
- Organizing document requirements. Churches are still required to include the appropriate purpose and dissolution language in their Articles of Incorporation and bylaws. This language can determine whether the organization qualifies at all.
So why do most churches apply anyway?
An organization cannot just claim to be a church. It must meet the requirements of one. Publication 1828, Tax Guide for Churches and Religious Organizations, provides a list of characteristics that are generally attributed to churches, which 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
The IRS has every right to make inquiries to determine whether an organization fits the definition of a church. See Free Church of America v. Commissioner, 71 T.C. 920 (1979).
The one thing worth noting: it is not enough to say you are a church. The IRS has made determinations that certain religious organizations are not churches, but may be eligible for tax exemption nonetheless. If the nonprofit had relied solely on Section 508 for its 501(c)(3) status, it would not be tax-exempt, because it did not meet the filing-requirement exemption.
For this reason alone, many churches seek 501(c)(3) status by filing the Form 1023 Application for Tax Exemption, to confirm that they are indeed recognized as a church by the IRS.
Another important reason a church might want to officially apply is to receive the determination letter. A church will only receive this if it applies for 501(c)(3) status. Those who may request the letter include:
- Grantmakers. Most foundations require a determination letter before they will consider an application. Many cannot make a grant without one on file.
- Banks. Opening accounts and qualifying for nonprofit banking terms routinely turns on it.
- State exemptions. Sales tax and property tax exemptions are state matters, and many states either ask for the federal letter or use it to shortcut their own review.
- Major donors. Individuals making substantial gifts, and the advisors around them, often want written confirmation that contributions are deductible.
Additionally, a church may benefit from applying because of:
- Listing in IRS records. A recognized church appears in Tax Exempt Organization Search, where donors and grantmakers look.
- Certainty. A determination letter is the IRS agreeing, in writing, that the organization is what it says it is. Without one, church status is simply the organization’s own position — which holds up until someone with money on the line disagrees.
The case for not applying
Some churches choose never to officially apply, and instead rely on the automatic exemption through Section 508. They may do so because of:
- Cost. The Form 1023 user fee is $600, which does not include any legal fees if the church chooses to hire an attorney to assist.
- Disclosure. An application is a detailed account of doctrine, governance, finances and leadership. Some congregations object on principle.
- Time. Preparation takes weeks; IRS review commonly takes months.
- You may not need it. A congregation funded entirely by member giving, seeking no grants, with banking already in place, may never be asked.
The honest test is not philosophical. It is whether anyone whose decision matters to you is going to ask for the letter. If you intend to pursue grants, buy property, or grow beyond member giving, the answer is usually yes.
If you decide to apply
To apply with the IRS, churches use Form 1023 and complete Schedule A, which asks specifically about the characteristics that distinguish a church. Form 1023-EZ is not available to churches, whatever the organization’s size.
The one thing worth being careful about: whichever route you choose, choose it deliberately and document why. A church that assumes it qualifies, stops filing, and turns out to be a religious organization rather than a church faces automatic revocation after three missed returns.
What if I don’t want these 501(c)(3) restrictions?
Some churches do not want to subject themselves whatsoever to the 501(c)(3) restrictions. If that is the case, the church must not hold itself out to be tax-exempt — which means donors cannot write their donations off on their taxes, and the church is subject to taxes.
If the church does want to be created for a private benefit, it can incorporate as a for-profit entity rather than a nonprofit. However, this may turn off potential congregants and donors.
Related reading: Ministry or Church? The IRS Draws a Line · Does “Church” Mean Christian?
This article is general information, not legal advice, and reading it does not create an attorney-client relationship. Rules differ by state and change over time. Please speak with a licensed attorney about your own situation.