Should Churches File for Recognition of Tax-Exempt Status?

Should Churches File for Recognition of Tax-Exempt Status?

The Internal Revenue Code provides an automatic federal tax exemption for churches.

Some churches choose to file for formal recognition of tax-exempt status and some do not. The following questions may help a church to decide whether to file for tax-exempt status:

• How large is the church expected to become? If the expected income is less than “x dollars,” it may not make sense to file.
• Does the church expect to be involved with other larger churches? Their governing guidelines may require you to have a formal IRS status.
• Will the church be doing overseas ministry? If so, it may make sense to have formal IRS status.

You should discuss with your legal counsel whether the benefits of filing the Form 1023 are worth the costs.

Because of the First Amendment to the Constitution guaranteeing freedom of religion, the IRS has long adopted a largely hands-off approach to regulating churches.

For example, as long as an organization qualifies as a church, it need not apply to the IRS to receive its tax exemption—the exemption is automatic. Moreover, churches need not file the dreaded IRS Form 990 or 990-EZ–the annual information forms that other charities must file each year.

However, many churches apply to the IRS anyway. The advantages of doing so are that (1) the organization will obtain official recognition of its tax-exempt status which assures donors that their contributions are tax-deductible, and (2) it will be listed in IRS records as a qualified charitable organization and it can obtain a determination letter from the IRS stating that contributions to it are tax deductible.

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