Inside Look at Churches Tax Exemption, 501c3’s and More

The United States is home to more than 1.5 million non-profit organizations. According to the International Revenue Service (IRS) subsection 501(c), these organizations may be exempt from federal income tax. A large percentage of these non-profit organizations are religious organizations.

Daniel Chand

Associate Professor of Political Science Daniel Chand said churches “basically fall under the same tax rules as a 501(c)(3) non-profit organization.” He continued, “and if you give money to those organizations, not only are they tax exempt, but you can claim a tax deduction when you give money to those organizations.”

The Director of Religious Studies at Kent State University, David Odell-Scott, said churches that meet the requirements of Internal Revenue Code (IRC) Section 501(c)(3) must apply for tax-exemption status from the IRS. “The exemption status is never automatic, the organization has to file paperwork,” Odell-Scoot said.

Religious organizations that meet the criteria of this code may receive all of the following benefits: exemption from Federal income tax, tax-deductible contributions, possible exemption from sales and employment taxes, reduced postal rates, exemption from federal unemployment tax and tax-exempt financing. This tax code was put in place to help small churches that couldn’t afford to pay taxes be able to keep their doors open, and also to ensure that there is clear separation between church and state.

Allowing churches to be tax exempt must also have its limits and that is why an amendment was set in place to discourage churches from getting involved in politics. This is known as the Johnson Amendment. The amendment has been a provision in the U.S. tax code since 1954.

The Johnson Amendment prohibits all 501(c)(3) non-profit organizations from opposing or endorsing political candidates. This amendment also states that if the rule is violated, then the offending organization could lose its tax-exemption status.

David Odell-Scott talking about churches tax exemption policy and if they can lose it.

The “National Council of Nonprofits” says this amendment is in place because they have “long held that the public’s overall trust in the sector would diminish and thus limit the effectiveness of the nonprofit community if individual 501(c)(3) organizations came to be regarded as Democratic charities or Republican charities instead of the nonpartisan problem solvers that they are.” In other words, if religious non-profit organizations began promoting certain political ideas, their goal could turn from helping solve local and national issues to only pushing their agendas forward, thus losing the trust of communities.

Odell-Scott argues these limits for what a religious non-profit can say about politics does not go against the freedom of religion because “there are limits to speech.” He continued, “Freedom of speech does not necessitate an absolute, but it does protect the rights of individuals.” There are other ways a religious non-profit can lose their tax-exemption status other than pushing a political agenda.

According to irs.gov, there are other ways a religious organization can lose their tax-exemption status other than being politically active. A church can lose their 501(c)(3) benefits if their activities only serve private or personal interests.

Religious organizations also risk losing their exemption if a religious non-profit earns too much income in unrelated activities. For instance, if a church earns an excess of money on the side from a business not related to the non-profit, the IRS reserves the right to take away any and all tax-exemptions.

Odell-Scott said churches are no different than any other non-profit organization in terms of losing their tax-exempt status if they violate the regulations set in place. All non-profits that fall into the category of 501(c)(3) abide by the same standards.

There may be both pros and cons to churches getting a tax exemption. Both sides have valid arguments and according to ProCon.org, some are:

Some also feel that allowing churches to remain tax exempt is forcing people to support religion, even if they oppose what some or all of the religious organizations represent. Professor Chand argues that this is not totally true, and that taxpayer’s dollars do not go straight to churches, the churches first have to apply for public funding. According to “The Annual Report on Philanthropy,” religion gets more money from tax-payers than any other non-profit organization.

However, there are those that argue that religious organizations need tax-breaks because it helps them to spend more money on the community, rather than just using their money to pay off taxes and debts. One individual that supports churches maintaining their tax-exempt status is Julie Cory, reverend of the First Christian Church of Kent.

We went local to see what their side of the exemption was.

The debate for whether churches should remain tax-exempt was further ignited when former Texas congressman Beto O’Rourke suggested to reform IRC Section 501(c)(3). He suggested that religious organizations (including churches and mosques) should lose their exemption status if they oppose same-sex marriage. When asked about his views on the tax-exemption O’Rourke said, “There can be no reward, no benefit, no tax break for anyone or any institution or organization in America that denies the full human rights, and the full civil rights, of everyone in America.”

Julie Cory

Professor Chand said he would be reluctant to enact O’Rourke’s plan because then, “you’re sort of bumping up against what might be the churches doctrine, their mission or however they would define their mission.”

As of right now, there is no motion to change IRC section 501(c)(3) in any way. All religious organizations continue to have the opportunity to stay tax-exempt but must also keep following the rules set in place by the Johnson Amendment. President Donald Trump had vowed to “get rid of the Johnson Amendment,” but Americans United for Separation of Church and State said he has yet to make on his promise.