Should a Church Obtain a §501(C)(3) Determination Letter from the IRS?
Under Internal Revenue Code (IRC) §508(c)(1)(A), churches are automatically considered tax-exempt under §501(c)(3). As a result, churches are not required to seek Internal Revenue Service (IRS) recognition of that tax-exempt status through a formal determination letter. However, for various reasons, some churches still choose to apply for a §501(c)(3) determination letter from the IRS. As a result, each church must weigh the potential benefits and adverse consequences of applying for IRS recognition of its tax-exempt status.
Automatic Tax-Exempt Status for Churches
While most charitable organizations must apply for tax-exempt status under §501(c)(3), churches explicitly do not need to apply if they meet certain criteria, including a recognized creed and method of worship, a regular congregation, regular worship services, and a set place for worship. If an organization meets the IRS definition of “church,” it does not need to file Form 1023 with the IRS or pay an application fee to reap the benefits of its automatic federal tax-exempt status. Likewise, while most other nonprofit organizations must file Form 990 with the IRS as an annual information return, churches are also exempt from this requirement.
Benefits of Applying for an IRS Determination Letter
Despite the automatic §501(c)(3) status that §508 grants churches, some churches still file Form 1023 with the IRS to get a formal §501(c)(3) determination letter. Potential benefits of seeking an IRS determination letter may include the following:
- Churches may increase transparency for the public about finances, governance, and general operations by filing forms with the IRS. This information is also available to the public, which can help increase public confidence in the church.
- A §501(c)(3) determination letter can make it easier to qualify for state and/or local income tax exemptions. In California, a church with an IRS determination letter must fill out Form 3500A, a two-page application, to obtain state tax-exempt status. On the other hand, a church without an IRS determination letter must complete Form 3500, an eight-page application, to obtain state tax-exempt status.
- An IRS determination letter can make it easier to qualify for property tax exemptions. California law does not require churches to provide an IRS determination letter to apply for a church exemption. Still, they must show that their property is used solely for religious worship for the accomplishment of those purposes. Churches that own other property used for worship and certain school operations may also qualify for a religious exemption from property taxes. Again, while an IRS determination letter is not required, it may make the application process easier.
- Many grant applications, donation platforms, and other funding sources require an IRS determination letter. Therefore, if a church wishes to seek funding through grants or similar avenues, it may need an IRS determination letter.
- Donors may prefer to give solely to organizations that can provide clear proof of 501(c)(3) status through an IRS determination letter, especially if their gifts are large or a donation is made through a foundation.
Adverse Consequences of Applying for an IRS Determination Letter
As mentioned above, seeking an IRS determination letter introduces an element of public transparency and regulatory oversight that some churches may not want. For instance, applying for and maintaining 501(c)(3) status also requires churches to make significant information about their governance, operations, and activities available to the IRS. Formal recognition of tax-exempt status can expose churches to potential audits, monitoring, and even corrective action by the IRS.
Furthermore, seeking a 501(c)(3) determination may prompt an increased level of public scrutiny. Most nonprofit organizations strive to be transparent to the public about their missions and operations. However, not every church may be prepared to adopt the practices that nonprofits typically should adopt, or to disclose sensitive information about internal operations to the public.
Frequently Asked Questions (FAQ)
If churches are automatically tax-exempt, why do some still apply for IRS recognition?
Even though churches qualify for automatic exemption under §501(c)(3), some choose to apply for a formal IRS determination letter to strengthen credibility with donors, grantors, and state and local government agencies. The letter serves as official proof of tax-exempt status, which can simplify administrative processes and reassure supporters.
Do churches need an IRS determination letter to accept tax‑deductible donations?
No. Contributions to churches are generally tax‑deductible, whether or not the church has applied for recognition. However, donors sometimes feel more confident when a determination letter is available, since it provides written confirmation from the IRS.
How does IRS recognition affect a church’s interactions with state or local agencies?
While federal law grants automatic exemption, some state and local agencies may request IRS documentation when processing applications for property tax exemptions, sales tax exemptions, or charitable registrations. Having a determination letter can streamline these processes.
Can applying for IRS recognition help with grant funding?
Yes. Many private foundations and corporate grant programs require applicants to submit an IRS determination letter as proof of §501(c)(3) status. Churches that plan to pursue grants often apply for recognition to meet these eligibility requirements.
Protect Your Mission with Confidence
The legal requirements for churches and charitable organizations can feel overwhelming, but you don’t have to navigate them alone. At the California Center for Nonprofit Law, we monitor the latest developments so you can concentrate on your ministry with clarity and confidence. If you’re ready to explore whether obtaining a 501(c)(3) determination letter is necessary for your church, contact us today at (949) 892-1221, email info@NPOlawyers.com, or connect with us online to schedule a consultation.