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Should Churches Seek 501(c)(3) Nonprofit Status?

As an attorney representing churches, I have had this question come up a number of times over the years. Should our church seek Section 501(c)(3) nonprofit status? My initial response is usually, "why would you want to do that?" As a church, you are already deemed to be a de facto charitable organization in the sense that you are exempt from taxes and you can take tax-deductible donations. These are the two primary reasons an organization would seek 501(c)(3) status. As churches, you are also constitutionally shielded from government scrutiny, so you don't have to worry about annual reporting to the federal or state government. So you now have the best of both worlds.

By filing for tax-exempt status, you are asking the government to bless your already existing status. And you are potentially giving the government an ability to regulate you and/or terminate your status if they determine that you violated certain rules. This came up after the last two presidential elections when the IRS tried to revoke the tax-exempt status of certain churches for violating the rules related to advocating for political candidates. The strongest argument that the churches had in their defense was that the IRS never granted them their tax-exempt status in the first place, so they cannot now revoke such status. Had the churches filed with the IRS and received a Determination Letter, this defense would not have existed.

So all of that being said, there still are times when it is necessary for a church to take such a step. In cases where I have helped church clients obtain IRS approval, the church was in the process of taking on a significant new ministry, such as a school. In such a case, the school will have to file for separate 501(c)(3) status. If the school is affiliated with the church, then the church will also have to file for exempt status. The IRS will want to bless the whole picture, or they will likely refuse to bless any of it. Alternatively, if a church has a large number of smaller ministries, it may make sense to get an overriding approval from the IRS so you can be assured that the church's ministries will be treated as ministries of the church rather than separate businesses.

How you structure the church and the ministries of the church depends on a lot of different criteria. The overriding goal should be simplicity, because ultimately you want your focus to be on your mission, not on running a corporation. Good advice from an attorney and accountant will be necessary, but again, their charge should be to keep it simple.

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