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Questions concerning tax-exempt status of churches escalate

With the escalating scrutiny of all non-profit organizations, including churches, it is no surprise there has been an increase in inquiries to California Southern Baptist Convention concerning the tax-exempt status of churches.

According to Steve Pearson, CSBC’s chief financial officer, the most common request is for an “affiliation affidavit” acknowledging the church is in good standing. He explained this is accomplished by churches being listed in the CSBC Annual, which includes a list of member congregations.

“Being listed in the Annual automatically qualifies CSBC churches for tax-exempt status under a group exemption granted to the Convention by the Internal Revenue Service and the California Franchise Tax Board (FTB),” Pearson explained.

He said the exempt status relates exclusively to any corporate income tax on any net surplus of the church. A church is still required to pay taxes on many other activities such as sales tax, payroll tax, and sometimes property tax and tax on unrelated business income.

“There is some confusion about tax exempt status for churches,” Pearson noted. “Churches refer vendors and others to CSBC when ministry activities win support for vendor donations or favored pricing, and evidence of tax exempt status is required. Often it must be explained that, for IRS federal purposes, a church is tax exempt by statute. That means that as long as a church is doing the things a church is suppose to do, it is tax exempt.”

Pearson said no paperwork, application or letters are required from the IRS for exempt status. However, the church will not be listed on the IRS Website in its directory of tax exempt 501(c)(3) organizations. Because of this some other evidence of exempt status is needed. CSBC will often issue, for the church to keep on file, an affiliation affidavit to facilitate requests requiring some kind of documentation of a church’s tax exempt status.

A good resource for churches, Pearson said, is IRS Publication 1828, Tax Guide for Churches & Religious Organizations. “The publication actually covers the material in pretty simple terms regarding these issues,” he noted

Not a surprise to most, California rules are different, Pearson said. “A church in our state must be pro-active in obtaining tax exempt status from the California Franchise Tax Board.   CSBC does hold a group exemption determination letter for state purposes, similar to the federal group exemption; however, because churches must be pro-active, CSBC almost always recommends the church file FTB form 3500A to apply for its own state tax exemption determination letter.

“After that, churches need to file a Statement of Information (form S-100) every two years to stay in good standing with the Secretary of State’s office.”

Adding to the confusion is the question of identification numbers for a church. As part of organizing the church, it is important that an application for Employer Identification Number (EIN) (form S-4) be filed, Pearson said. It is similar to a personal Social Security number in that it establishes a unique number for the church to use in any correspondence with almost any federal agency. It is required if the church hires employees.

Churches often ask for the Convention’s EIN, not realizing each church needs its own number. The EIN is not connected in any way with the tax exempt status of the church, but is simply an identification number assigned to the church by federal authorities.

At the heart of the confusion over exempt status, identification numbers and what forms are or are not required, is not having a clear understanding of church formation and ongoing governance – not from a theological perspective, but related to financial, stewardship and administrative activities of the church.

It is confusing and can be formidable, Pearson said, but CSBC offers resources to help churches navigate the issues. A team of church starting strategists is available to support new churches as they get started and become a corporate organization.  Mike McGuffee, CSBC ministerial leadership specialist, offers specialized support in areas of church governance and by-laws. CSBC stewardship specialist Rod Wiltrout is available to assist churches with administration of treasury and compliance functions.

“The Convention is available to help churches work through the maze of regulatory requirements and encourage them to be faithful stewards to God and to the authorities He has placed to govern us,” Pearson said. 

Finally, he noted it is important that every church have the professional resources and expertise available to assist with specific circumstances and issues of the church. He recommended engaging the services of a certified public accountant and an attorney with expertise unique to churches and ministers. 

“The regulatory environment will only grow more intense in the foreseeable future,” Pearson said. “You will want to seek the best advice and resources available to your congregation.” 

To learn more about documents every church must file, click here.

For more information or assistance contact:

Mike McGuffee
Ministerial Leadership Specialist
559.229.9533, x.232
E-Mail Mike McGuffee

Rod Wiltrout
Church Finance Specialist
GuideStone Representative
559.229.9533, x.258
E-mail Rod Wiltrout

Church Starting Strategists

 

Last Published: June 24, 2013 1:13 PM