Are Churches Exempt from Federal Excise Tax?

To qualify for tax-exempt status under IRC Section 501(c)(3), an organization must:

• Be organized and operated exclusively for exempt purposes: The organization's primary activities must further religious, educational, scientific, or charitable objectives.

• Ensure earnings do not benefit private individuals: No part of the organization's net earnings may insure to the benefit of private shareholders or individuals.

• Avoid substantial lobbying activities: The organization must not attempt to influence legislation as a substantial part of its activities. 

• Refrain from political campaign intervention: The organization may not participate in or intervene in any political campaign on behalf of (or in opposition to) any candidate for public office.

Organizations recognized under IRC Section 501(c)(3) must adhere to specific rules to maintain their tax-exempt status: 

• Public Benefit: The organization's activities should serve the public interest and not private interests.

• Operational Test: The organization must engage primarily in activities that accomplish one or more of its exempt purposes. 

• Organizational Test: The organization's organizing documents must limit its purposes to those described in Section 501(c)(3) and not expressly empower it to engage in activities that do not further those purposes.

• Compliance with Public Policy: The organization's purposes and activities must not be illegal or violate fundamental public policy.

While churches are automatically considered tax-exempt, other organizations must apply for recognition of exempt status using the following steps:

1. Determine Eligibility: Ensure the organization meets the requirements for tax-exempt status under IRC Section 501(c)(3).

2. Obtain an Employer Identification Number (EIN): Apply for an EIN, which is necessary for tax filings and banking purposes.

3. Complete the Appropriate Application:

• Form 1023: For organizations seeking recognition of exemption under Section 501(c)(3).

• Form 1023-EZ: A streamlined version for smaller organizations that meet specific criteria.

4. Submit the Application: File the completed form with the IRS, along with the required user fee.

5. Await Determination: The IRS will review the application and issue a determination letter recognizing the organization's tax-exempt status if approved.

Churches benefit from certain additional considerations under the IRC:

• Automatic Tax-Exempt Status: Churches that meet the requirements of Section 501(c)(3) are automatically considered tax-exempt and are not required to apply for recognition of exempt status.

• Exemption from Annual Filings: Unlike other tax-exempt organizations, churches are not required to file annual information returns (Form 990).

• Audit Protections: Special rules apply to IRS inquiries and examinations of churches, providing certain procedural protections.

Refer to the official websites below for a detailed explanation of each section and rule discussed in this blog.

https://www.irs.gov/pub/irs-pdf/p1828.pdf

https://www.irs.gov/charities-non-profits/churches-religious-organizations

https://sgp.fas.org/crs/misc/IF12520.pdf

WRAP

Churches are generally exempt from federal excise taxes due to their tax-exempt status under IRC Section 501(c)(3). While they enjoy automatic recognition of this status, adherence to specific operational and organizational requirements is essential to maintain their exemption. Other organizations seeking similar status must undergo a formal application process with the IRS.