The IRS generally recognizes any distinct legal organization with a recognized creed and form of worship, a formal religious doctrine, a religious history, or a defined ecclesiastical government as a church. Churches like many other charitable organizations, qualify for exemption from federal income tax under IRC section 501(c)(3). Contributions to an IRC section 501(c) organization are deductible for the donor to a certain extent. By taking certain actions or participating in certain activities, a church can lose its 501(c)(3) status.
A concern with any 501(c)(3) is that the organization’s assets will be transferred to insiders instead of being used to pursue the organization’s purpose. This transfer is called private inurement; it can result in loss of 501(c)(3) standing. Church insiders could include clergy, board members, officers, and even employees. Examples of private inurement include insiders receiving excessive compensation for their duties, distributions of funds, or property received by insiders in exchange for less than market value compensation.
A church’s actions can only benefit recognized groups in need of charity or the community at large; it cannot act in a way that benefits a select, non-charity worthy group. One example of a group of individuals in need of charity that a church could serve is the poor. If a church’s actions benefit a private interest, it is subject to losing its standing as a 501(c)(3). The private interest does not have to be related to an insider for the church to lose its standing. Tangential, minor benefits to a private group are not enough for a church to lose 501(c)(3) status; the benefit must be substantial.
Charitable organizations, including churches, are generally prohibited from participating in the political process. In general, no organization, including a church, may qualify for IRC section 501(c)(3) status if a substantial part of its activities is attempting to influence legislation, known as lobbying; a church risks losing its 501(c)(3) status if it becomes involved in substantial lobbying activities. A church lobbies when its leadership contacts, or if it urges the public to contact, legislators with the intent to sway their votes. What constitutes substantial depends on the circumstances and a variety of factors are considered, including the time and money spent by the church on lobbying.
Campaigning for Candidates
Churches cannot campaign for, or against, a candidate in any way, either directly or indirectly. Campaigning includes, but is not limited to, promoting a candidate or making campaign contributions. However, churches are permitted to participate in non-biased voter education activities without risking their 501(c)(3) status. Also, religious leaders can run for office without risking their church’s tax-exempt status. However, those candidates cannot campaign during official church functions.
Illegal Activity and Fundamental Public Policy
If a church participates in illegal activity or violates public policy, it can lose its 501(c)(3) status. When determining whether a church will lose its tax-exempt status, a court will consider the prohibited acts in which the church participated, as well as how much of the church’s time was spent participating in those activities. There have been cases regarding the issue of racial discrimination in education, where organizations have not qualified for IRC 501(c)(3) status on grounds that the activities of the organizations violated public policy even though the organizations did not violate any federal statutes or state or local laws.