By: Jerri-Lynn Wier
Most nonprofits do not automatically receive tax-exempt status; they must apply for 501(c)(3) status with the IRS. However, there are specific exceptions for religious nonprofit organizations.
Many religious organizations qualify as tax-exempt without needing to submit an application to the IRS. Nonetheless, to help donors verify their status, and to be recognized by the IRS, most religious organizations choose to apply for 501(c)(3) status under the IRS code.
Read on to learn about what tax-exempt status means, if religious nonprofits are automatically tax-exempt, how to apply for 501(c)(3) status and state tax exemptions, plus other taxes that your nonprofit should not overlook.
What is the difference between nonprofit and tax-exempt status?
Nonprofit corporation and tax-exempt status are two distinct legal designations.
Nonprofit corporation refers to an entity's incorporation as a nonprofit organization under state law, while tax-exempt status relates to its federal income tax exemption under the Internal Revenue Code of the IRS.
Many organizations that form a nonprofit corporation also seek tax-exempt status, which often leads to confusion between the two terms.
How is a nonprofit established?
Most organizations that eventually want to apply for tax exempt status with the IRS choose to form nonprofit corporations. These corporations are created under state laws specific to nonprofits and are different from regular for-profit corporations. They must follow rules similar to those of C Corporations or S Corporations, but they also have special rules regarding the use of any profits they generate. For example, they cannot give profits to members or use them for political campaigns.
After forming your nonprofit with the state, or in some cases the county, and obtaining an EIN, your religious nonprofit organization can apply for tax-exempt status with the IRS. Generally, nonprofits do not receive tax-exempt status until they submit Form 1023 to the IRS and obtain approval. However, some religious organizations automatically receive tax-exempt status upon incorporation.
Once the IRS grants your organization tax-exempt status, its EIN will be recognized as belonging to a tax-exempt entity.
Some religious nonprofits receive automatic tax-exempt status
Some organizations do not need to file with the IRS to be tax-exempt if they meet the requirements of section 501(c)(3) of the Internal Revenue Code. These qualifying nonprofits include:
- Churches, synagogues, temples, and mosques
- Secondary organizations affiliated with churches or associations of churches
- Small nonprofits with annual gross receipts under $5,000
Houses of worship that are formed with the state or county are automatically tax-exempt. This means that donations made to these organizations can be tax-deductible.
If a nonprofit has a religious purpose but does not run a house of worship, it is not considered a religious corporation. Instead, it is just a standard nonprofit corporation.
Houses of worship often choose to apply for tax-exempt status, even though they are automatically tax-exempt. Reasons include:
- Applying provides them with an official letter stating this status, which can help with fundraising and applying for state tax exemptions.
- If your nonprofit doesn’t go through the application process with the IRS, it won’t be listed in IRS records as having tax exempt status. This means the IRS cannot confirm that donations to your organization are tax-deductible. This can deter potential donors who want to ensure your organization is truly tax-exempt.
- Additionally, some grant-making organizations will not give grants to religious corporations unless they can verify the organization's tax exempt status on the IRS website.
