Why Churches Should Apply for 501(c)(3) Status

In our earlier blog post “Should My Church Incorporate?” Attorney David Powers of Powers Compliance, PLLC explained that churches by default have tax-exempt status with the IRS:

“A church is by default tax-exempt under 501(c)(3) of the Internal Revenue Code. Churches are not required to file an application for recognition of tax-exempt status like other nonprofits seeking exemption under 501(c)(3) of the Code. Instead, the IRS automatically recognizes churches as exempt. But a church may nevertheless seek formal recognition from the IRS by filing Form 1023. In addition, if a church is part of a denomination that has received formal recognition of tax-exempt status, the church may be recognized under the denomination’s Group Exemption umbrella.”

In this blog post, we’ll explore the benefits of a church applying for formal 501(c)(3) recognition from the IRS when that church is not recognized under a denomination’s Group Exemption umbrella. 

Benefits of Formalizing a Church’s 501(c)(3) Status

There are many benefits to a church having formal recognition from the IRS. We’ll walk through a few here and if you have others, we’d love to hear from you!

• Discounts: Many companies provide nonprofits with deep discounts on their products or services. Foundational products such as Google Workspace for Nonprofits and Microsoft Office are available for free. Quickbooks Online is available for $160 per year as compared to the regular rate of $188/month (QBO alone is more than a $2,000 savings per year). Adobe also provides discounted rates for its products. TechSoup is a treasure trove for nonprofits and churches that have a 501(c)(3) determination letter from the IRS.

• Additional Funding Sources: Many foundations and other charitable organizations make grants available exclusively to tax-exempt organizations and require a copy of the IRS 501(c)(3) determination letter for verification. With formal 501(c)(3) status, churches open up avenues for funding beyond individual members giving. 

• Sales Tax: For organizations with 501(c)(3) status, most states will provide a certificate of sales tax exemption that can be used when purchasing from retailers. If a church does not have a determination letter from the IRS, they can still recoup sales tax paid in some states. But it’s a more arduous process as churches must submit reimbursements to the state for sales tax. 

The Process and Cost of Pursuing a Formal Tax-exempt Status from the IRS

Form 1023 is a lengthy and somewhat complicated document. We recommend using an attorney who is familiar with it. Our attorney, Powers Compliance, is well versed in 1023 submissions. Talk with your Auxilio Partner Strategist to contract with Powers Compliance. 

The total investment in this process may cost close to $5,000. From the time of submission to receiving the IRS determination, expect anywhere from 3-9 months (on average). 

An Investment That is Quickly Returned

Looking at software savings alone, pursuing a formal 501(c)(3) determination from the IRS has a return on investment of less than 2.5 years. In any business, this would be considered an excellent investment! If you are not covered under a denominational group exemption or already have your own 501(c)(3) determination letter, talk with your Auxilio Partner Strategist about this. If you have questions about incorporating, refer to our earlier blog post “Should My Church Incorporate?”