Churches and religious organizations play a massive part in philanthropy in the US, not to mention their influence on our culture and beliefs.
A report from Giving USA revealed that religiously affiliated people not only give generously to their religious congregations but are more prone to give to charities of any kind. Also, frequent attendance at religious services makes it more likely that people will give to religious causes and give more substantial gifts.
Significantly, year after year, the most significant percentage of charitable giving has gone to religion. The latest figures put religious giving at 31 percent of the charitable giving pie with the nearest other category being education at 14 percent.
With its outsized influence on the charitable sector, you would think we could all agree on what a religious organization is.
But the fact is that many of us are still confused about the differences between a "church,” a"religious organization," and "a faith-based organization."
The IRS has a lot to say about the differences between these groups. In most ways, they are treated like the typical charitable nonprofit, but in other ways, they are sometimes free from the oversight that most 501(c)(3) charities receive.
To try to get clear on what these terms mean, I turned to the IRS and sat through a webinar that helped explain a lot.
Here's some of what I learned.
A bona fide church is automatically considered a 501(c)(3) charity by the IRS and as such is tax exempt. The key here is to qualify as a church.
So what characteristics do churches have?
"Church" refers to a place of worship. That is not precisely spelled out in the tax code but generally refers to temples, mosques, and synagogues, as well as traditional churches.
The IRS uses these criteria when deciding if an organization can be called a church:
- A distinct legal existence
- A recognized creed and form of worship
- A definite and distinct ecclesiastical government
- A formal code of doctrine and discipline
- A religious history
- Members that are not associated with any other church or denomination
- Ordained ministers who have completed specific studies
- Literature of its own
- Established places of worship
- Regular congregations
- Regular religious services
- Sunday schools for religious teaching of children
- Schools that educate its ministers
A church, if it meets most of these standards, is automatically considered a 501(c)(3) charity.
However, churches that are automatically considered charities must also fulfill the requirements common to the 501(c)(3) status.
Those conditions include no benefit to an insider such as a staff member or director, little to no lobbying, no political advocacy, and activities that are legal (see How Not to Lose Your Tax-Exempt Status).
In other words, churches, to be considered 501(c)(3) charities, must act like other charities. If they do so, they may qualify for tax-exemption.
But, unlike other charities, Churches do not have to register with the IRS by submitting Form 1023. However, many do file to make their status clear to their donors and supporters. Churches that do officially register as charitable organizations are included on the IRS list of registered charities.
Churches that do not register with the IRS do not have to file yearly 990s, the tax document that all other charities must submit yearly. If the church has registered as a 501(c)(3), it does have to file a 990.
Religious groups are not places of worship. They do not usually belong to a particular denomination. They often try to bridge particular belief systems, although they can also be groups that study or promote a particular religion.
To be considered tax-exempt, a religious organization must register as a 501(c)(3) charity. That means filing Form 1023 (groups with income below $5000 annually are not required to file although they may wish to). Once registered, the organization must file an annual 990.
The term "faith-based" is not a legal term. It is used loosely to refer to a broad range of religiously involved groups that could be a church, a religious charity, or simply an unincorporated group based on religious values.
Usually, faith-based organizations (that are not churches), need to apply for 501(c)(3) status to accept donations that are tax-exempt for their donors and to apply for foundation grants.
For a full discussion of faith-based organizations, see What Is a Faith-Based Nonprofit?
There are many nuances to these terms, especially for churches. The best resource for more information is IRS Publication 1828, Tax Guide for Churches and Religious Organizations.
How Will the Tax Cuts and Jobs Act Affect Churches and Religious Organizations?
As of January 1, 2018, a new federal tax law took effect. It has a considerable impact on charitable nonprofits, including churches and religious organizations. Here are a few of those effects in brief:
- The change in charitable deductions for tax benefits makes it likely that fewer people will give charitable gifts because they will no longer qualify for a tax deduction. Because the standard deduction has increased dramatically, fewer people will itemize deductions.
- Fewer people will make charitable bequests since the estate tax threshold has doubled.
- Many more nonprofits will be hit with the UBIT (Unrelated Business Income Tax). There are at least two ways this could happen. The first is because losses from one unrelated business cannot be deducted from the profits of another to determine net unrelated business income. A second reason has to do with a tax on fringe benefits for employees having to do with complimentary parking on a nonprofit's property. Check out IRS guidance on this issue.
- Private religious colleges and universities may have to pay an excise tax on net investment income, such as from an endowment.
- Nonprofits may have to pay an excise tax on employee compensation over $1 million.
Because of these tax changes, it will be important to consult with an accountant about your finances and taxes.
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