For many churches, the question of whether to formally seek 501(c)(3) status with the IRS is a pivotal one. While churches are automatically considered tax-exempt under section 501(c)(3) and are not required to obtain IRS recognition of exemption, some choose to apply anyway, seeking added legitimacy or access to certain benefits. However, obtaining an IRS determination may be perceived as coming with limitations that affect how a church operates, speaks, and engages in public life. Understanding both the advantages and disadvantages is key for church leaders, boards, and pastors looking to make informed decisions.
The Built-In Tax Benefits for Churches
Unlike most other nonprofits, churches do not have to apply for tax-exempt status to be treated as such. Under Internal Revenue Code Section 508(c)(1)(A), churches are automatically recognized as 501(c)(3) organizations if they possess certain characteristics, including: a recognized creed and form of worship, a regular congregation, regular religious services, and an established place of worship. Organizations meeting the IRS definition of a “church” do not need to file Form 1023 with the IRS or pay an application fee to begin receiving federal tax-exemption benefits.
Churches are also exempt from filing Form 990 annual information returns, a requirement for most other nonprofits. This privacy can be an advantage in and of itself.
Advantages of Applying for 501(c)(3) Status for Churches
Some churches still choose to file Form 1023 and become officially recognized by the IRS for strategic or public-facing reasons. The potential benefits include:
- Greater transparency: Filing an exemption application can increase confidence in financial management for a church’s congregation and the general public.
- Additional Tax Exemptions: Some state or local tax exemptions may require IRS determination or be easier to obtain with an IRS determination letter. Similarly, it is often required for property tax exemption.
- Access to Greater Funding Sources and Services: Many grant application portals, donation platforms, or bank services require an IRS determination letter.
- Comfort for Donors: IRS recognition provides clear documentation for donors, especially for large gifts or foundation grants that may prefer to give to churches that can provide an official IRS determination letter.
Disadvantages of Applying for 501(c)(3) Status for Churches
However, churches that seek formal determination of 501(c)(3) status also subject themselves to greater regulation and scrutiny. The most common drawbacks include:
- Increased Oversight: Applying for and maintaining 501(c)(3) status means filing detailed information about governance, operations, and activities with the IRS. It opens the door to greater scrutiny, potential audits, and possible revocation if the church strays from tax-exempt purposes.
- Public Accountability: Though churches are not required to file Form 990, seeking a 501(c)(3) determination may increase pressure to disclose information, such as key financial or leadership information, and operate in accordance with nonprofit best practices, which not every small or independent church is prepared to adopt.
There is no one-size-fits-all answer for churches deciding whether to formally seek recognition of 501(c)(3) status. For some, the benefits of public perception and expanded funding access outweigh the risks. For others, particularly smaller or more mission-focused congregations, the built-in exemption with its minimal administrative obligations and increased privacy may be preferable. As always, churches should consult legal counsel and review their long-term goals before making a decision that could reshape both their ministry and their regulatory obligations.