Are Churches Required to Follow 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 "Christian church" as immune from civil jurisdiction on the basis that the "Christian church" is commissioned by Christ. Others do not claim civil immunity, but do question whether churches have compromised their mission by pursuing the 501(c)(3) path.
The civil immunity concept is not that difficult to address. It is completely true that the ecclesia is commissioned by Christ and He is head of the church He commissioned. Yet, it is also true that we do not reside exclusively in the Kingdom of God. We also reside in the kingdom of this world.
Legal immunity in the civil realm is not a matter of our theology, but of constitutions, laws and court interpretations. 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. Civil law does exist in the USA and it would be wishful thinking to contend that civil law is irrelevant to the American church.
Rather than assert an 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
A more serious question to deal with 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 would 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. The IRS view is that 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 many federal and state tax advantages that churches enjoy which the applicable tax or labor law links to the church's classification as a church 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),
- The ability of a church to elect a reimbursement option for unemployment insurance, rather than pay the unemployment insurance tax, and
- In some cases, the availability of the property tax exemption (a state level tax exemption).
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 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 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 trained 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 some 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.
- As to property tax (which could become an issue for any non-profit in the future), a church would prepare for that challenge by avoiding significant debt and perhaps even making voluntary gifts to the town to help the town with its expenses.
If churches followed these disciplines, then churches would experience a greater freedom. It is really the lack of economic autonomy – not the rules associated with 501(c)(3) tax breaks - that has diminished the voice of the church.
Even with economic autonomy, the church would still need to follow the rules of 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.
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, they can be handled with wisdom.
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.
At the federal level, the results 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 a church's classification under the tax laws.
Charting a Path
For the separation of church from the existing non profit legal structure to occur successfully, new legislation would be needed at both a state and federal level to establish the elective ability of a church to incorporate or otherwise organize as a new type of church entity that (a) would be recognized as a church, (b) would still have limited liability, (c) would be free to speak politically, (d) would be exempt from following certain specific laws that violate church doctrine, (e) would still avoid private inurement and (f) would forgo certain specific tax subsidies. Presently, those laws do not exist.
Accordingly, we 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. At the same time, we recommend that churches apply the financial disciplines we described earlier, so that the church enjoys financial autonomy. A church that is not dependent on tax benefit will not be shaken if those benefits are ever lost or voluntarily set aside.