As a church leader, you’re entrusted with both spiritual guidance and the stewardship of your organization’s resources. One critical aspect of this stewardship is maintaining and protecting your church’s tax-exempt status.
We can see what the IRS says a church must do to qualify as a 501(c)(3) and look at common pitfalls that could jeopardize your tax-exempt status.
What does the IRS say?
To qualify for and maintain tax-exempt status under Section 501(c)(3), a church must:
- Operate exclusively for exempt purposes: As a church, this will be your mission or vision
- Ensure no part of its earnings benefit private individuals: Commonly referred to as “private inurement” we will talk about this more in the article
- Refrain from substantial lobbying activities: Limited lobbying is permissible, but it must not constitute a substantial part of the organization’s activities
- Avoid political campaign intervention: Churches must not participate in or intervene in political campaigns on behalf of or in opposition to any candidate for public office
Following the mission and vision God has called you to will generally follow these rules to protect your church’s tax-exempt status, however lets look a little closer at some common pitfalls that could be jeopardizing.
Common Pitfalls That Jeopardize Tax-Exempt Status
1. Political Campaign Intervention
Political bias is almost everywhere now. However, engaging in political campaign activities, such as endorsing or opposing political candidates, can lead to revocation of tax-exempt status. This includes:
- Making verbal or written statements in favor of or against a candidate.
- Distributing materials that favor a particular candidate.
- Allowing biased or one-sided political campaign events on church premises.
Church Law & Tax has a great article with all kinds of scenarios of actions that are prohibited or permitted regarding political activities. See here.
2. Excessive Lobbying
While churches may engage in some lobbying, it must not constitute a substantial part of their activities. Exceeding this limit can result in penalties or loss of tax-exempt status.
3. Private Inurement and Private Benefit
Private Inurement is a fancy term in the non-profit world that simply means that a church’s resources or income should not be used to unfairly benefit individuals who are connected to it. Such as board members, officers, or key employees.
A church needs to have a good benevolence policy in place and understand tax implications if money is given or distributed to any of these individuals.
4. Unrelated Business Income
Earning income from activities unrelated to the church’s exempt purposes can jeopardize tax-exempt status if it becomes a substantial part of the organization’s activities. Examples include operating a business that is not related to the church’s mission.
In my opinion, this shouldn’t stop churches from searching out other income producing sources, just need to understand the tax and legal implications related to the business activities.
Best Practices for Maintaining Compliance
Here’s a few steps to follow to help protect your church’s tax-exempt status:
- Develop Clear Policies: Establish written policies regarding political activities, benevolence/compensation, and business operations.
- Regular Training: Educate staff and volunteers on compliance requirements and ethical standards.
- Financial Oversight: Implement financial controls and conduct regular audits.
- Consult Professionals: Seek guidance from legal and accounting professionals specializing in nonprofit organizations.
Conclusion
Protecting your church’s tax-exempt status is essential for fulfilling your mission and serving your community effectively. By understanding the requirements and proactively addressing potential risks, you can safeguard your organization’s integrity and financial health.
If you need help reviewing your church’s compliance practices or developing some policies or safeguards to protect your tax-exempt status, feel free to reach out!
