By: Jerri-Lynn Wier
Religious organizations often establish themselves as nonprofit corporations or religious corporations, depending on the state, to benefit from limited liability protection for officers and directors, tax exemptions, and better access to grants. However, to maintain these benefits, they must comply with legal requirements at the federal, state, and local levels.
Read on to learn about the legal requirements for religious nonprofit organizations.
Tax-exempt status
According to the IRS, churches, including synagogues, temples, and mosques, are automatically considered tax-exempt if they meet the requirements of section 501(c)(3) of the Internal Revenue Code. They do not need to apply for recognition of this status.
However, many churches choose to seek IRS recognition because it assures church leaders, members, and donors that they are tax-exempt and eligible to receive tax-deductible contributions.
Religious organizations that do not qualify as a church must apply for tax-exempt status by submitting Form 1023 or 1023-EZ.
If a church or religious organization makes money from activities that are not related to its main mission, that income will be taxed.
To maintain their tax-exempt status, tax-exempt organizations are typically required to file an annual information return (Form 990 or Form 990-EZ). However, churches and certain other religious organizations are not required to file this annual return or notice with the IRS. They also do not lose their tax-exempt status automatically if they do not file.
Your nonprofit religious organization must follow other rules to qualify for and keep its tax-exempt status. These rules include:
- Your organization must operate solely for recognized charitable purposes as defined by the IRS.
- Its earnings cannot benefit private individuals or shareholders, except for fair compensation for services.
- Lobbying should not be a major part of its activities.
- Your organization must not participate in political campaigns.
- Its purpose and activities must be legal and align with fundamental public policy.
State filing requirements
If your religious nonprofit is incorporated, it must comply with state laws regarding annual or periodic registrations. Each state’s regulations differ slightly, but some common requirements exist:
- Registered agent: Most states require nonprofit corporations to appoint a registered agent in their state of formation to receive service of process.
- Sales/use or property tax exemptions: Your nonprofit may need to register to obtain any state tax exemptions, such as property tax and sales tax exemptions. Depending on the state, these exemptions may require periodic renewal. Even if your nonprofit has tax-exempt status from the IRS, some states still need you to register for state tax-exempt status to avoid paying state franchise tax.
- EIN: After your nonprofit is legally formed, you can apply for a federal tax ID number, also known as an Employer Identification Number (EIN), from the IRS. An EIN is necessary for both nonprofit and for-profit organizations, regardless of whether your organization has employees.
- New hire reporting: States may require employers to report information about new hires to a designated state agency.
- Initial reports: Some states require initial reports and fees to be submitted shortly after incorporation.
- Annual report: Many state nonprofit corporation laws require filing an annual report with the Secretary of State's office. Be sure to note any deadlines for annual or biannual filing dates to maintain compliance.
When it comes to charitable solicitation registration, there are general rules that apply to most nonprofits (religious or otherwise):
- If your religious organization wants to raise donations, you will likely need to register for fundraising in one or more states. The requirements and forms for this registration can differ significantly from state to state.
- If your nonprofit plans to solicit donations across multiple states, be prepared to submit separate registrations to each relevant state agency. Additionally, most states require initial registration but also mandate annual or bi-annual renewal filings. Keep track of these renewal deadlines, as late fees may be incurred if they are missed.
- Several states have specific regulations that require nonprofits to include "disclosure statements" on written solicitations or confirmations of pledges and gifts.
In addition, the following rules about charitable solicitation registration apply to religious nonprofits:
- Many states do not require nonprofit religious organizations to register or report when they ask for charitable donations. However, each state has its own rules about what this exemption means for religious groups. As a result, some religious organizations may need to register, while others do not.
- Some states ask religious organizations to submit a written request to confirm their exemption from registration. Other states expect the organization to determine whether they are exempt and may not provide legal advice or an official decision on this matter.
- Additionally, states may still ask religious organizations to file a financial disclosure report with a state agency.
Understanding and adhering to these requirements is crucial for your organization's fundraising efforts.
