501(c)3

[Jon Twitchell]

What are the pros & cons for a church requesting a favorable "Letter of Determination" from the IRS regarding their 501(c)3 status?

What is the process/cost for doing so?

[Ryan Scott]

If you're a Nazarene congregation you can't do it. There is only one federal designation for the Church of the Nazarene in the US and it's the General Board of the Church of the Nazarene. They have the 501c3 designation and every congregation falls under that scope. Individual congregations and districts can incorporate on a state level in some states. If you need a copy of the 501c3 letter, you can request it from Headquarters.

[Jon Twitchell]

What about non-Nazarene churches?

[Ryan Scott]

It depends on the denomination. Some of them have each congregation separately incorporated and others use the same denominational model. A lot of it depends on polity and such. I'm fairly certain you could give it a try to get IRS recognition on your own, you'd just need to be incorporated with the state. Of course the denomination wouldn't like it much and your bylaws are the Manual; I'm not sure if there is any provision there that would keep an individual 501c3 designation from being legal.

[Jon Twitchell]

Is there a Nazarene Manual stipulation regarding this?

Also, if my church's tax status is directly connected to the denomination's tax status, then can a local church actually do anything to jeopardize their tax status?

[Ryan Scott]

Is there a Nazarene Manual stipulation regarding this?

Also, if my church's tax status is directly connected to the denomination's tax status, then can a local church actually do anything to jeopardize their tax status?


I'm not sure the exact manual provisions and how they've been interpreted, but this question comes up all the time, so the General Secretary's office probably has a really good answer for you.

Although, it may not be all that great in retrospect. There's recently been some trouble with the whole "the district owns all the property" practice. You never know what a court would find.

[Jon Twitchell]

Let me explain where the question comes from: :)

Google Checkout recently launched a program for non-profits. For one year, they will not be charging any transaction fees for non-profits that receive donations online.

Here's the catch... you must give them a copy of last year's US990, or a favorable IRS "letter of determination." Churches do not file 990s, and it was my understanding that churches were not required to request a letter of determination--that they were automatically considered 501(c)3 without any further paperwork, applications, or fees.

I've even read somewhere (though I can't find where) that churches shouldn't go through this process, because it invites Federal oversight where none is required or needed. Further, that by inviting this sort of oversight, churches were opening the door to (for lack of a better phrase) a breakdown of the separation of church and state.

Thoughts?

[Ryan Scott]

Well any organization claiming tax exemption needs a 501c3. I don't believe individual congregations have to file a 990 for any reason. It does provide public access to fund raising and expenses, but I can't imagine why anyone would care if that was public, unless they had something to hide or were worried that someone was actively trying to discredit them.

I think, for that situation, you could probably just get the general Church of the Nazarene 501c3 letter and be fine. It would depend on how google wanted to handle the situation.

I don't know if you even could file a 990 since the tax-exempt designation is through HQ. I'm guessing HQ isn't 501c3, but under a different tax exempt code (I don't know this for sure, but I'm guessing one of the other options more fits their purpose).

Churches aren't the same as every other charity in terms of the IRS code, even though they all get the same tax exemption. It's the reason why so many preachers are "ministries" rather than "churches." It just makes for easier paperwork.

Then again, I'm no expert in this; I just know enough to get myself in trouble. I'm much better with 501c3 questions that deal with organizations that aren't churches.

I'm guessing your first step would be to see if google would accept the general denomination's letter.

[Wilson L. Deaton]

Here's the catch... you must give them a copy of last year's US990, or a favorable IRS "letter of determination."

A few years ago I applied for a non-profit bulk mail permit for my church. My D.S. sent me a copy of the denominational "letter of determination." It was considered acceptable.

Wilson

[Dave McClung]

Is there a Nazarene Manual stipulation regarding this?

Also, if my church's tax status is directly connected to the denomination's tax status, then can a local church actually do anything to jeopardize their tax status?

I have been around the church for a long time and I have never heard of the IRS auditing a Nazarene church or taking any action to revoke their tax status.

I have known of the IRS questioning an individual's claim for charitable deduction, but it is almost always because their claims exceed the amount shown on the church' book.

So, to answer your question, a local congregation of the Church of the Nazarene needs to abide by the tax laws because it is the right thing to do, not because there is any real threat of their loss of tax exempt status.

[Walter Thompson]

In MS a church must file as a 501c3 for tax exempt status. We are already filed as a non profit for the state. If we had the 501c3 we could have saved over $35,000 in state taxes on materials bought for our church. I know of several churches who have filed for and received 501c3 in MS. They had to change their name to do so as IRS said they could not have both filings, so, it is very confusing. I had asked the district at one time, informally, if we could use their status but never heard anything further on it.

Boy could we use that $35,000 now. It would finish up all we have left to do.

[Dave McClung]

In MS a church must file as a 501c3 for tax exempt status. We are already filed as a non profit for the state. If we had the 501c3 we could have saved over $35,000 in state taxes on materials bought for our church. I know of several churches who have filed for and received 501c3 in MS. They had to change their name to do so as IRS said they could not have both filings, so, it is very confusing. I had asked the district at one time, informally, if we could use their status but never heard anything further on it.

Boy could we use that $35,000 now. It would finish up all we have left to do.

Walt, you are correct about the process, but wrong about the number. "501c3" is a federal regulation -- a provision of the IRS Code. A "501c3" organization is exempt from federal income taxes.

A "501c3" organization may not be automatically exempt from state or local taxes. In most states, a "501c3" is automatically exempt from state and local taxes, but some states require a separate filing.

[Jon Twitchell]

BTW... I'm not interested in doing anything that is either illegal or unethical... :) My interest here lies not only in my own church, but in providing relevant consulting to churches that host their websites with me.

But according to the way I read the US Tax Code, and the IRS Publication 557 that explain it, a church is not required (by the IRS) to file form 1023 (which is the form requesting a 501(c)3 designation). Churches are automatically considered 501(c)3 without any further paperwork/documentation.

Some organizations are not required to file Form 1023.

These include:

Churches, interchurch organizations of local units of a church, conventions or associations of churches, or integrated auxiliaries of a church, such as a men's or women's organization, religious school, mission society, or youth group.

Any organization (other than a private foundation) normally having annual gross receipts of not more than $5,000 (see Gross receipts test, later).


These organizations are exempt automatically if they meet the requirements of section 501(c)(3).



I realize two things: Some states may require churches to file a 1023 in order to also attain a sales tax exemption or some other benefit. Also, Google is certainly within their rights to require a 501(c)3 Determination Letter in order to use their service (although I'm disappointed with thier decision to do so).

So, let me go back to my original question(s). What are the reasons for a local church (non-denominational) to file for 501(c)3 status? Are there reasons why a church should avoid doing this? Does inviting this sort of federal oversight somehow blur the line between church and state?

Thanks!

[Ryan Scott]

So, let me go back to my original question(s). What are the reasons for a local church (non-denominational) to file for 501(c)3 status? Are there reasons why a church should avoid doing this? Does inviting this sort of federal oversight somehow blur the line between church and state?


As you can see in Walt's post, they filed for 501c3 status because of a stipulation in the State law that could have or has saved them money, but you'll also notice that they had to change the name, in essence because they are now legally two entities. That can get confusing legally. They are a "branch office" so to speak, of the General Board of the Church of the Nazarene as all organized Nazarene congregations are. If they've filed a separate 501c3 for their congregation, they are also a separate entity with whatever name has been listed there.

Like I said before, it could be (an evidently is) entirely possible and it seems, from Walt's post, that the district is ok with it. I'm not sure every district would be.

Prior to that post, I had never heard of any extra benefit to having an individual 501c3 for the congregation. I worked with a lot of compassionate ministry centers that are run out of Nazarene congregations and there are a number of benefits to having a separate designation for those entities, but I had previously never heard of any reason for the congregation itself to do so.

[Dave McClung]

So, let me go back to my original question(s). What are the reasons for a local church (non-denominational) to file for 501(c)3 status? Are there reasons why a church should avoid doing this? Does inviting this sort of federal oversight somehow blur the line between church and state?

Thanks!

Let me answer as clearly as I can:

1. In all of my years of doing legal work for churches, I have never become aware of the IRS claiming that the tithe and offering income from a local church is taxable. All of the instances where the IRS has become involved in church finances have been where a church has "unrelated income" that isn't closely related to the primary mission of the church -- such as running a business.

2. The most frequent reason for a church to file for a determination letter doesn't come from the IRS, but from potential donors. From time to time a donor will request assurance that planned donations are tax deductable. The only way that any tax exempt organization (church or otherwise) can give assurance that a donation will be allowable by the IRS as a charitable deduction on the donors return is to provide a copy of the determination letter from the IRS.

I know a number of individuals who go to great lengths to avoid triggering an IRS audit. The concern isn't simply about whether or not the donation will be deductable. It is whether or not a donation will trigger an audit of the donors return. Those donors want a copy of the determination letter to include with their tax return.

3. Are there reasons a church should avoid filing for a determination? The only reason I can think of is the paperwork involved. I have been doing the paperwork for the Foundation for Christian Learning. It only takes an hour or two a year, but it seems to always come due when I am the busiest.

It does require that the church keep careful record of its finances, but that is something a church should do anyway.

4. Does asking for a determination letter blur the separation of church and state? I don't think so. A church that gets the determination does so for the benefit of its donors. The determination letter makes no difference for the church (execpt for special cases like Google). It can make a big difference for the donors.

[Dave McClung]

As you can see in Walt's post, they filed for 501c3 status because of a stipulation in the State law that could have or has saved them money, but you'll also notice that they had to change the name, in essence because they are now legally two entities. That can get confusing legally. They are a "branch office" so to speak, of the General Board of the Church of the Nazarene as all organized Nazarene congregations are. If they've filed a separate 501c3 for their congregation, they are also a separate entity with whatever name has been listed there.

Like I said before, it could be (an evidently is) entirely possible and it seems, from Walt's post, that the district is ok with it. I'm not sure every district would be.

Prior to that post, I had never heard of any extra benefit to having an individual 501c3 for the congregation. I worked with a lot of compassionate ministry centers that are run out of Nazarene congregations and there are a number of benefits to having a separate designation for those entities, but I had previously never heard of any reason for the congregation itself to do so.

I would not use Walt's example as a "real case." Walt was just describing what he thought would have been necessary for his church to avoid paying Mississippi taxes. In fact, Walt's church didn't do what he described and could not have.

[Jon Twitchell]

Thanks for all the help and thoughts on this.

If I read correctly, there is also a $300 paperwork fee that goes along with requesting a letter of determination from the IRS.

In any case, we're going the PayPal route... We'll end up paying a small fee on every transaction, but we didn't care to work through a paperwork issue, and don't expect a large number of online transactions.

Thanks again...