Are Churches Required to Follow the 501(C)(3) Rules?
Churches in the USA possess a degree of immunity in the civil realm. 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.
Because many civil laws do apply to the church, it is useful to understand those laws and how they may apply to the church. It is from a base of understanding that good choices can be made.
The Mission of a Church
The question prompting this discussion is whether the pursuit of 501(c)(3) status compromises the mission of the church. Some feel that a church should speak to the political choices of the day (including elections) and 501(c)(3) status appears to 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 are confronted with the 501(c)(3) rules for two very different reasons - either of which may 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 many 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 exemption of a church from filing the annual 990 income tax return,
- 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.
Even if a church elects 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. However, it is not altogether settled what this protection means when church doctrine conflicts with other protected rights.
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.
If a church determines to incorporate, we still recommend that it do so under the non-profit or religious corporation laws of a state, as applicable. Forming a "church" as a business entity with individual ownership is inconsistent with our legal understanding of "church." Individual ownership is a private benefit.
In that churches presumably qualify as 501(c)(3) entities, we recommend that churches enjoy that status, applying for formal recognition of 501(c)(3) status (form 1023), if proof would be useful.
Most of the 501(c)(3) regulations are not a great burden. The 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, the area is not yet entirely settled.