UBCNews - Business - Do Churches Need IRS Approval To Be Tax-Exempt? What The Law Says

Episode Date: February 9, 2026

Welcome back, everyone. Today we're digging into a question that surprises a lot of faith-based leaders: Do you actually need IRS approval to be tax-exempt? The answer might not be what you think. The Freedom People City: Tempe Address: 1753 E Broadway Rd Ste 101 Website: https://thefreedompeople.org

Welcome back, everyone. Today we're digging into a question that surprises a lot of faith-based leaders. Do you actually need IRS approval to be tax-exempt? The answer might not be what you think. Right, and it's a huge misconception. Many people assume you have to file paperwork and get a stamp of approval from the IRS. But churches and certain faith-based organizations are actually automatically tax-exempt under federal law. Automatically exempt. That's the key phrase here. So we're talking about IRC Section 501C-1.3, and specifically 508C1A. Can you break that down for us? Absolutely.

Section 508C. Wahan 1A of the Internal Revenue Code says that churches, their integrated auxiliaries and conventions or associations of churches, don't need to notify the IRS to get 501C3 status. They're recognized as tax exempt by default if they meet specific criteria. So what are those criteria? I mean, how does the IRS define a church for tax purposes? Great question. The IRS uses what's often called a 14 or 15 point test.

It looks at things like having a distinct legal existence, a recognized creed, regular worship services, an established place of worship, ordained ministers, and religious literature. You don't have to hit every single point, but they look at the combination of characteristics. Mm-hmm. Interesting. So if a faith-based organization meets those criteria, they're automatically exempt. But here's what confuses people. If you're already exempt, why do so many churches still apply for formal recognition? Well, there are practical reasons. Even though you're automatically exempt, getting that determination letter from the IRS gives you official. documentation. It assures donors that their contributions are tax deductible, helps with banks when

you're opening accounts, and some states require it for property or sales tax exemptions. So this comes down to credibility and convenience, not legal necessity. Exactly. Many institutional funders and grant programs will only work with organizations that have that formal IRS letter, plus it provides transparency. Donors can see you're officially recognized. Now, let's Let's talk about what organizations need to do to maintain that tax-exempt status. Automatic doesn't mean you can do whatever you want, right? Definitely not. You still have to follow the rules. Your organization must operate exclusively for religious, educational, or charitable purposes. No part of your net earnings can benefit

private individuals. That's called private in yourment. You can't engage in substantial lobbying or participate in political campaigns for or against candidates. And what about filing requirements? Do churches have to file those annual Form 990 returns that other nonprofits do? No, and that's another benefit. Churches are generally not required to file annual Form 990 returns, unlike most other 501 C3 organizations. That's less paperwork and reduced oversight, which a lot of faith leaders appreciate.

I remember when I first learned this, I was advising a small congregation, and they were shocked they didn't have to wade through that mountain of paperwork every year. I bet that was a relief, though I suppose the IRS still expects you to know the rules, even if you're not filing returns annually. Oh, absolutely. And that's where people sometimes get tripped up. They think no paperwork means no rules. That's definitely not the case. That point about filing requirements sets up our next piece. Unrelated business income. But first, a quick word from our sponsor. The Freedom People is dedicated to personal liberty and empowerment, offering a full-service platform that helps organizations legally minimize government overreach.

If you're a founder or leader of a faith-based organization seeking to understand automatic tax-exempt status, we can help you set up a 508C1A, faith-based organization or private ministerial association. Our experts guide you through the entire process, ensuring everything is set up properly in just a few weeks. Learn more at thefreedompeople.org. Picking up on filing requirements, how do you handle income that's unrelated to your exempt purpose?

Because I've heard that can get tricky. Yes, and that's a critical area. If a faith-based organization earns income from activities unrelated to its exempt purpose, Let's say you're running a commercial coffee shop or renting billboard space, that income may be subject to unrelated business income tax or Ubit. So you're still tax exempt for your core religious activities, but side businesses get taxed? Right. And while the IRS doesn't publish a concrete percentage limit, it's commonly suggested that keeping unrelated business income to a reasonable level helps avoid scrutiny. exceeding a substantial amount can potentially jeopardize your tax-exempt status. Okay, so let's address some common misunderstandings.

I think a lot of people hear tax-exempt and assume it means total immunity from all taxes. That's the biggest misconception. Tax exemptions primarily apply to income tax on funds received for religious purposes, tiths, offerings, donations. But you're still responsible for employment taxes, payroll taxes, payroll taxes for staff, and depending on the state, property taxes, and sales taxes. And what about religious leaders themselves? Do they pay taxes on their income? Absolutely. Pastors and other staff are employees or self-employed individuals,

and they're liable for personal income tax on their salaries, stipends, and honorariums. The church being tax exempt doesn't mean the people working there don't pay taxes. In other words, automatic exemption for the organization doesn't try to be. translate to automatic exemption for individuals. Right. That's a crucial distinction. So automatic exemption doesn't mean no filing obligations at all? Correct. Even if you're automatically exempt from applying for 501C3 status, you still have to comply with other tax obligations like payroll tax reporting. Failure to file required informational returns can lead to penalties or scrutiny. Now, let's talk about when a faith-based organization

should formally apply for 5-O-1-Aul C-3 status versus relying on automatic exemption. How do you make that decision? Well, that depends on your goals and how you plan to operate. If you're a traditional church with regular services and you want to keep things simple, automatic exemption works well. But if you're seeking grants, working with institutional donors, or need state tax exemptions, applying for formal recognition makes sense. And what about organizations that describe themselves as private ministerial associations?

I've heard that term thrown around. Well, that's a term some groups used to describe themselves. But remember that private ministerial association isn't a recognized legal or tax designation by the IRS. The IRS recognizes churches, their integrated auxiliaries, and conventions or associations of churches as automatically tax-exempt under 508C-1-A. if they meet the criteria for a church. So this refers to a descriptive term rather than an official category? Exactly. And here's the key point. Regardless of what an organization calls itself,

all entities, whether they've applied for formal recognition or are operating under automatic exemption, are subject to federal and state laws. The IRS retains the authority to scrutinize any organization to ensure compliance with tax laws and proper use of funds. for exempt purposes. That's an important distinction. Um, let me ask you this.

Have you seen situations where leaders thought they were completely outside IRS jurisdiction because they didn't file for 501C, three? Unfortunately, yes. There's a misunderstanding that automatic exemption means complete privacy and freedom from all government oversight. But automatic exemption is an exemption from the requirement to apply for 501C, 3 status, and from filing annual Form 990 returns. Automatic exemption doesn't excuse you from the law itself

or the core requirements for tax-exempt status. So the fundamental operational rules still apply. Operating for exempt purposes, avoiding private in-eerment, limiting political activity. Exactly right. Whether you're operating under automatic exemption or you've received formal recognition, those Corps 501C3 requirements apply across the board.

So to everyone listening, if you're starting or leading a faith-based organization, what's the most important takeaway here? Know your options and understand the rules. Automatic exemption is real and valuable, but it comes with responsibilities. Whether you apply for formal recognition or rely on automatic status, you must operate exclusively for exempt purposes, avoid private benefit, and limit political activity. Consulting with a tax professional or attorney can help you make the same. the right choice for your situation. Perfect advice. Have you ever wondered how different your organization's path might be with the right structure in place? That choice really can make all the difference. Thanks for breaking this down with us today. This has been incredibly helpful.

My pleasure. This topic deserves clarity, and I'm glad we could shed some light on it.