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

Churches have traditionally spoken to the issues of society.  It is also the case that certain of the requirements for maintaining tax exempt status under section 501(c)(3) of the Internal Revenue Code constrain non-profit organizations from endorsing candidates for elective office or funding their candidacy. For some, the constraints on political involvement found in the Code are inconsistent with the mission of the church. 

The specific question prompting this discussion is whether the pursuit of 501(c)(3) status by a church compromises its mission. Some churches are reluctant to file the application for recognition of tax exempt status (form 1023) out of concern that the act of filing the application might compromise the church in some fashion. 

Civil Immunity

A good starting point for the discussion is to consider the concept of civil immunity.  Churches in the USA possess a degree of immunity in the civil realm. It is not a carte blanc immunity from civil law. Nonetheless, there is a genuine recognition by our legal system that churches should be afforded certain immunities so as to preserve freedom of religion.

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 Application for Recognition of Tax Exempt Status

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.  

  • The first reason relates to the set of laws selected for incorporation. In a number of 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).  If a church incorporates under a set of laws that incorporates the 501(c)(3) rules, then the church has brought those rules into its governance at the time of its inception. 
  • A second reason  that 501(c)(3) rules apply to churches 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.  Those requirements are noted on our  Tax Status of Churches page. 

In other words, failing to file the 1023 application for tax exempt status does not remove a church from the jurisdiction of section 501(c)(3) of the tax code. The 1023 application is not the culprit.

Tax Advantages and Elections

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.   

Good Citizenship

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.  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. Many 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.  Absent legislative change or judicial rulings exempting churches from the 501(c)(3) rules related to political speech, certain forms of political involvement by a church will continue to be inconsistent with 501(c)(3) status. Many churches will be comfortable working within the framework that now exists; others may be inclined to pursue changes to that framework.

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.  At the same time, a church should purpose to be economically viable, regardless of tax benefits, so that it is positioned to chart the path that is most consistent with its mission, should it ever be called upon to choose between tax exempt status and mission.