Are Churches Required to Follow the 501(C)(3) Rules?

We are aware that there are fine ministries that dispute the need of the church to seek or obtain 501(c)(3) status. Some see the "church" as immune from civil jurisdiction. Others do not claim civil immunity, but do question whether churches have compromised their mission by pursuing the 501(c)(3) path.

Civil Immunity

Churches in the USA do possess a certain degree of immunity in the civil realm because of constitutions, laws and court interpretations; however, it is not a carte blanc immunity from civil law. As an example, it is rare for a court to interfere in the internal affairs of a church, as courts are reluctant to examine church polity or church doctrine. By contrast, a court would not hesitate to examine issues of negligence in the context of a church. 

Rather than assert a carte blanc immunity that our legal system does not recognize, it is more productive for us to try to understand the civil laws and how they may apply to the church.  It is from a base of understanding that good choices can be made.     

Compromise of Mission

The question prompting this discussion is whether the pursuit of 501(c)(3) status compromises the mission of the church. Some feel that the church should speak to the political choices of the day (including elections) and 501(c)(3) status does hamper political speech.

Our view is that it is not the pursuit of 501(c)(3) status and the filing of a 1023 form that makes a church subject to the 501(c)(3) rules.  Rather, churches must deal with the 501(c)(3) rules for two very different reasons - either of which could be sufficient alone.  

  • The first reason relates to the set of laws selected for incorporation. In many states churches incorporate under the non profit laws of the state, rather than a set of laws specifically limited to religious corporations. They do so because that is simply the way their state law is structured.  Non profit laws typically contain provisions that are the equivalent of 501(c)(3).
  • A second reason is that churches accept the tax benefits that flow from 501(c)(3) status. These tax benefits are preconditioned on a church meeting the basic requirements of 501(c)(3) status. (See our IRS on Tax Status of Churches page.) 

There are significant elections and tax advantages that churches enjoy which are linked to their classification under 501(c)(3) of the Code. These include:

  • The ability of a church to grant a housing allowance to its pastor,
  • The income tax deduction available to donors for gifts to the church,
  • The exemption of the church from paying income tax on non-UBIT income,
  • The ability of a church to treat pastors as self-employed for SECA purposes (which goes to the practical ability of a pastor to opt out of social security), and
  • The ability of a church to elect a reimbursement option for unemployment insurance, rather than pay the unemployment insurance tax.

If a church does not want to subject itself to the 501(c)(3) rules, then it should be prepared to forego the tax advantages or elections that are specifically linked in the law to 501(c)(3) status. For many churches this would require planning, as they lack the economic autonomy to forgo all of the advantages of tax exempt status. 

Economic Autonomy

Economic autonomy requires discipline. The following are examples of how economic autonomy is gained.

  • A pastor would only buy a house he can afford without the tax benefit of the housing allowance.
  • The congregation would be encouraged to live on an amount that allows them to tithe and give, without the tax break of a deduction for giving (i.e. they would save or invest (not spend) the equivalent of the tax benefit each year.)
  • A church would budget in a manner that would provide a surplus, even if the church had to pay income tax.
  • A church would set aside each year an amount that would be equal to the unemployment tax on each employee, so that if it ever had to pay that tax, it could afford it.
  • A pastor who had opted out of social security would learn to live on the income that would be available if a social security tax had to be paid.

If churches followed these disciplines, then churches would be in a better position to operate without the tax advantages of 501(c)(3) status, if ever called upon to do so.

Property Tax Exemption

We did not include the property tax exemption in the above listing of 501(c)(3) tax benefits, as the various states have differing laws as to which entities are entitled to a property tax exemption. In New York state, the church property tax exemption is protected by the state constitution on the basis of religion. Thus, the exemption does not hinge upon 501(c)(3) status.  In another state, the church property tax exemption might be totally dependent upon 501(c)(3) status.

Regardless of the basis of the property tax exemption in a particular state, taking the exemption for granted does not strike us as wisdom.  

Good Citizenship

Even if a church elected to operate without the tax advantages of 501(c)(3) status, it would still need to be a good citizen of the land and follow the many labor laws and non-discrimination laws that apply to all citizens. This does not mean that a church would be unable to discriminate on the basis of religion. An essential attribute of any religion is its doctrine. Diversity in church doctrine is a protected diversity in our nation and appropriate for a diverse population.

Organization of a Church Entity at the State Level

If a church is located in a state that has a separate set of laws specifically limited to churches, then we recommend that the church organize under those laws.

If a state only offers two forms of incorporation: "for profit" and "non profit," it becomes difficult to organize as anything other than a "non profit."  The reason is that "for profit" laws seldom "fit" churches. Those laws were not created with churches in mind.

At the state level, the various laws that grant certain immunities, exemptions or privileges to the church are often tied to the set of laws under which churches have historically organized. If a church determined to organize as something other than a non profit or religious entity, then the laws of the state might not recognize it any longer as a church (entity entitled to the immunities, exemptions or privileges associated with religious non profit organizations). In other words, the concept of "non-profit" and "church" have become so intertwined over the years, that it is difficult to separate the two with our existing legal structure.

Federal Considerations

At the federal level, the consequences of losing 501(c)(3) status would be mixed. Some federal laws grant immunity or exemption to churches on the basis of religion. Those laws broadly define the term "church."  The ability of a church to discriminate on the basis of religion is an example.

Other federal laws, that are of a tax nature, grant tax benefit to churches based upon 501(c)(3) classification under the tax laws. Thus, loss of 501(c)(3) status would result in a loss of those benefits.

Charting a Path

Legislation has been in place for a substantial period of time linking certain tax exemptions to compliance with 501(c)(3) rules.  Absent legislative change, certain forms of political involvement by a church will continue to be inconsistent with 501(c)(3) status.

We still recommend that churches continue to organize under the non profit or religious corporation laws of a state, as applicable, and enjoy 501(c)(3) status, applying for formal recognition of that status (form 1023), if proof would be useful.  

From our perspective, most of the 501(c)(3) regulations are not a great burden.  Those rules that relate to avoidance of private gain are good rules. Individuals should not receive profit from a church.  As to the laws that deal with political speech, it would be an excellent result if those laws could be liberalized. Absent a change in the law, it seems best to simply learn the rules and handle them with wisdom.