Should Your Church Apply for 501(c)(3) Tax-Exempt Status?
Should Your Church Apply for 501(c)(3) Tax-Exempt Status? https://www.youtube.com/watch?v=pcBKiGbxw5I Should you file for 501(c)3 status? If you’re starting a church and wondering whether you should file for tax-exempt status, you’re not alone. It’s one of the most common questions I get from new nonprofit leaders—especially those planting churches. And it’s a good one. Because while churches are automatically considered tax-exempt under federal law, applying for official 501(c)(3) status still comes with real pros and cons. In this article, I’ll walk you through what you need to know—so you can make the right decision for your ministry. First, a Quick Primer Because churches are one of the oldest organizations in the United States, the IRS treats them a bit differently. If your church meets the basic IRS definition of a church— including the 5 key requirements of regular services, a distinct legal existence, a recognized creed and form of worship—you already qualify as tax-exempt under section 501(c)(3), without having to apply. That said, there are some very good reasons churches still go through the formal 501(c)(3) application process, and a few drawbacks to consider. Let’s start with the benefits. Why a Church Might Want to Apply Anyway When you apply for 501(c)(3) status, you’re asking the IRS to send you a formal letter—called a “determination letter”—stating that your church is officially recognized as a tax-exempt organization. That letter can significantly benefit your church. 1. It builds donor trust. This is a big one. Donors are far more likely to trust your church—and donate large sums of money—when they can request your official nonprofit determination letter. In fact, many donors’ accountants will require it. If you’re hoping to raise gifts of $1,000, $10,000, or even $100,000, having that letter on file becomes essential. Without it, you may struggle to close major gifts—especially from outside your immediate community. 2. It opens the door to grants. If your church’s long-term vision includes grant funding, a 501(c)3 letter will be a requirement. The vast majority of foundations and government agencies will ask for your IRS determination letter as part of the grant application process, as well as documents, such as your latest form 990 filing, that can only be provided if you register with the IRS. Especially if you plan to engage in charitable programming in your community – including feeding the homeless, creating a food pantry, or opening a school, this step may be a necessary one. 3. It unlocks exclusive discounts and services. This third, and perhaps most important, advantage of formally applying for 501(c)3 status is the world of support it can open up for your nonprofit. Corporations primarily give to 501(c)3 recognized entities, and there are a lot of benefits this provides, up to and including: $10,000/month in free ad credits from Google (Ad Grants) Free design tools like Canva Pro Project management software like Monday.com And thousands of other tools, platforms, and services—many of which are free or deeply discounted for nonprofits that I covered in a previous article. If your church plans to scale operations, build an online presence, or run community programs, these perks can save you thousands each year. What Are the Downsides? Despite all those benefits, applying for 501(c)(3) status as a church comes with some key restrictions. Let’s break down the three major ones. 1. You’re subject to private inurement rules. Private inurement means that no part of your church’s income or assets can unfairly benefit insiders—including pastors, board members, or their families. You’ll need to avoid conflicts of interest, especially when it comes to financial transactions, salaries, or contracts. This doesn’t mean you can’t pay your staff, but it does mean your church will need to follow formal compensation practices, avoid insider deals, and document your decisions properly. 2. You’re restricted in lobbying and legislative advocacy. Churches that hold 501(c)(3) status can only engage in an “insubstantial” amount of lobbying—typically interpreted as no more than 2%–5% of their total activities. If your church is deeply involved in pushing legislation, lobbying elected officials, or advocating for specific policy changes, this could become a serious constraint. 3. You cannot endorse or oppose political candidates. This is an important distinction with 501c3 status, as a lot of pastors and church leaders have been concerned about the lack of free speech in the pulpit. If your church becomes a 501(c)(3), you are prohibited from supporting or opposing political candidates in any way. That includes: Inviting a candidate to speak in a way that promotes their campaign Giving a candidate free access to your church’s audience, facilities, or platforms Publishing voter guides that favor or disfavor candidates Keeping out of politics might be your best bet as a church, but if it isn’t and your ministry intends to regularly engage in political discourse, this is something to keep in mind. What’s the Right Call for Your Church? There’s no one-size-fits-all answer. If your church plans to fundraise at scale, pursue grant funding, and take advantage of nonprofit tools and discounts, then applying for 501(c)(3) status is probably the smart move. Applying for 501(c) status can open up larger donations, give you access to grants, and record you as a legitimate charity in the eyes of the public – giving you access to thousands of corporate discounts, giveaways, and dollars of support. But if your church is heavily involved in political activity, or if you want to preserve the full range of freedom that comes with informal IRS recognition, you may choose to hold off—for now. Want Help Filing? If you’re leaning toward applying, I’ve got a resource for you. It’s called The Exempt List for Churches—a simple checklist that walks you through exactly what you need to do to get your 501(c)(3) status as a church. Just contact us and I’ll send it your way. And if you have questions about the process or whether it’s the right step for your ministry, feel free to reach out, we’ll help you take the right step towards planting your seeds.
The Top Nonprofit Discounts and Free Tools on the Web in 2023
Welcome, nonprofit leader! This is a regularly updated list of the top discounts and free nonprofit tools on the internet – companies that are making nonprofits a part of their mission and the way they give back – to help you save thousands of dollars with running your nonprofit. We’ve screened all of these tools for quality too, so you’re not getting a cheap or free tool at the cost of your organization’s impact. Sign up for our email list so you will always hear about any new ones we find! Marketing DreamHost offers free hosting for life for nonprofit websites GeekPack Match pairs new web designers with nonprofits in need of a website Canva offers free premium accounts for nonprofits to help with easy graphic design and material creation Tinyletter is a free email service for small businesses and nonprofits with under 5,000 subscribers. Fundraising Benevity is a corporate donation site where employees of major corporations can have their company match their donation to you. CyberGrants is used by lots of for-profit companies to screen nonprofits for grants – get recognized here to make corporate grants easier. GiveButter is entirely free fundraising software for nonprofits. Operations Monday.com is a project management tool that offers free accounts up to 10 users for nonprofits as part of their corporate mission. Google for Nonprofits offers the entire suite of Google tools, Mail, Sheets, Docs, Drive, and more, to all nonprofits with limited storage for free. Techsoup is the top marketplace in the world for discounted software, only for nonprofits. Get tools like Microsoft Office, Quickbooks, and more for up to 90% off their sticker price. VolunteerMatch is a database that connects nonprofits and volunteers who want to serve – register here for free and get local volunteers excited about what you do. Taproot Plus is a volunteer matching site that pairs professional volunteers across the country with nonprofits that have a task that needs doing, particularly remote tasks. Reputation Guidestar is one of the top 3 nonprofit ratings websites – and one of only two that nonprofits with small revenues can qualify for. Getting a Guidestar badge will help with donor trust. Great Nonprofits is the other one of the top 3 nonprofit ratings websites that new, low revenue nonprofits can sign up for – they crowdsource ratings on nonprofits to help donors, volunteers and clients find the nonprofits that best fit them. Know of a resource that’s not on our list? Contact us!
How Much Does It Really Cost To Start a Nonprofit in 2023?
[et_pb_section admin_label=”section”] [et_pb_row admin_label=”row”] [et_pb_column type=”4_4″][et_pb_text admin_label=”Text”] How much does it really cost to start a nonprofit in 2023? Sure, you could fairly easily incorporate a nonprofit for the absolute bare bones. $250 will get you a registered agent and filed with your state in most states, plus $600 for federal filing and you’ll have an “official” nonprofit in the eyes of the law. But that says nothing about the reason you’re creating a nonprofit – to make an impact. If you want to create a nonprofit that makes a significant impact, you need to start up with more than just your filing fees – but a workable budget to get you going. And, of course, inflation. Most other pricing lists on the internet haven’t accounted for inflation and are at least 25% lower than your real costs. So how much will it cost to start your nonprofit? These are all averages, but on average starting a nonprofit will cost between $2,875 and $17,740, plus rent and utilities (if needed) and whatever it will cost to actually deliver your services. Here’s how each of these costs breaks down. Nonprofit Filing Costs in 2023 – $1,350-$5,350 First up is filing costs. These are what it will cost to get your nonprofit properly incorporated and get your 501(c)3 status. Registered Agent – $50-250 A registered agent is the person who will receive your paperwork and legal filings against you in a state. Some states will allow you to be your own registered agent, but if you want to keep your home address private, you’ll likely need a registered agent. Registered agents charge $50 per year on the very low end and up to $250 if you want services like ongoing compliance, mail delivery, or a phone number. Articles Of Incorporation and Bylaws Creation – $0-$1,500 In order to incorporate your nonprofit, you’ll need your articles of incorporation and a set of bylaws for governing your nonprofit. The first, and cheapest, option is to go with a template. There are some good sources for general IRS-approved articles of incorporation, here and here, and bylaws, here and here, online. If you’re going to go with a template however, I recommend finding one designed for your state, since the nonprofit laws of each state vary. The best templates are put out by nonprofit associations in that state, like Minnesota’s here. If you’re concerned about ownership of the organization, such as preventing your board from taking your organization from you at some point, how your nonprofit might work with other business entities, or want to create a special type of nonprofit, it may be better to ask a nonprofit attorney to draft your bylaws. This can cost up to $1500, depending on how complicated the provisions you seek are, but could be worth it for some nonprofits. NOTE: If you decide to use a template for your articles of incorporation, make sure that your template has the two required provisions for nonprofits. There are numerous “nonprofit” articles of incorporation templates that do not have the two required provisions for tax-exempt, 501c3 status with the IRS. If you file with those, you’ll have to amend your articles before getting 501c3 status. State Filing Fees – $25-$250 After you’ve had your articles and bylaws drafted, you’ll need to incorporate your nonprofit with your state. Each state charges a fee for filing your nonprofit. These fees range from $25 in Texas to up to $200 in Alabama. You might also get charged a fee for a certified copy, which you’ll want in order to send to the IRS. That fee ranges from $25-50. There is a list of filing fees by state here. Federal Filing Fees – $275-600 In order to get tax-exempt status, including 501(c)3 status, you’ll also need to file your nonprofit with the IRS. This article will focus on 501(c)3 status, since it is the most common. To get your 501c3 status, the IRS has two forms you can choose from, Form 1023 EZ and Form 1023. Form 1023 EZ – $275 Form 1023 EZ is, as it claims, the “easy” version of Form 1023. It is a two-page form that asks several questions about your intentions for your nonprofit, and asks you to sign a declaration that you will follow existing law. The problem with this form is that, since it was rushed into production to eliminate an IRS backlog in nonprofit applications, it has numerous limitations and traps for unsuspecting nonprofits. The most significant of which is that in order to qualify you have to project an income of less than $50,000, which most serious nonprofits will not stay under. Oh, and 10% of new applications are automatically audited because the form contains no proof you actually did anything you said you did. If you still decide to go with Form 1023 EZ, I highly recommend getting a professional to help you out. There are numerous declarations you make under penalty of perjury on the form that have a very specific meaning and if the IRS audits you and you don’t have them in place, you could lose your nonprofit status. Form 1023 – $600 Form 1023 is the primary application for nonprofit status. It is a much longer form that asks many specific questions about your nonprofit, and requires you to submit a narrative of activities, budget, and copies of your articles of incorporation, bylaws, and conflict of interest policy. Total filing cost for this form is $600. It is definitely doable by an individual, but I recommend getting a professional for this one as well. The sheer size of the form can be intimidating for many. Professional Help – $1000-$2750 Any government form you fill out is worth doing right, particularly the one your nonprofit will rely on for 501(c)3 status. While there are numerous nonprofit outfits who will help you file, proper filing for your state and federal paperwork will run you around $1000 and depending on what extra services
How to Get A Nonprofit EIN – A 5 Minute Guide
Getting a Nonprofit EIN can take 5 minutes, but it can also be confusing if you’ve never done it before. Here’s the step-by-step process for acquiring your nonprofit’s EIN.
Don’t File Your Nonprofit Articles of Incorporation Without These Two Clauses
Congratulations! You’re about ready to start your nonprofit journey (or maybe you already have), and you’ve gotten to the point of filing your state paperwork. You’ve downloaded a template off of the internet, figured out what you need to include, gotten your board together, and are just about ready to file your nonprofit paperwork. Have you begun working on your Nonprofit Articles Of Incorporation? STOP. If you’re like hundreds of new nonprofit leaders every year, you’re about to not include two crucial clauses that will make the IRS automatically reject your application when you apply for nonprofit status (if you’re using the long form) or revoke your nonprofit status if they audit you (if you’re using the short form). What are you about to do wrong? While the majority of corporations either don’t need to file articles of incorporation at all or only need some basic information (registered agent, name, and board), your nonprofit is required to have two additional clauses at the state level to get approved by the IRS at the federal level: a purpose clause and a dissolution of assets clause. These both must be in your articles of incorporation when you create your nonprofit with the state, or you will be rejected at the federal level. We’ll get to those clauses in a moment, but first, what are we talking about here? The first stage of legally forming any company (including a nonprofit) is to create the company. This is done by applying for a certificate of formation/certificate of incorporation from your state. To do this, you file a short form, often called the Articles of Incorporation. In most cases, once you receive your certificate of formation, you’ve created your company or organization, and you can then start doing business as that company, including creating a bank account, signing checks, and completing contracts under that business name. The form your state asks you to fill out will be pretty standard, with an option for adding additional clauses to your Articles of Incorporation. These articles may specify the powers of your organization, the liabilities of directors and officers, the control and powers of directors, etc. This document forms the basis for how your organization is governed and will be treated by law. How does this apply to nonprofits? Unlike other companies, which all pay income taxes, most nonprofits apply for tax-exempt status. If you’re forming a nonprofit, you know this means your nonprofit won’t pay any taxes on most of the income it receives. If you’re applying for 501(c)3 status like many nonprofits do, you also want your donors to get a tax write-off on their donations to you. When you apply for federal tax-exempt status, the IRS will ask you if you have two clauses in your Articles of Incorporation (which goes by a different name in a couple of states). 1. A purpose clause. “Section 501(c)(3) requires that your organizing document limit your purposes to one or more exempt purposes within section 501(c)(3), such as charitable, religious, educational, and/or scientific purposes. Does your organizing document meet this requirement?” 2. A dissolution clause. Section 501(c)(3) requires that your organizing document provide that upon dissolution, your remaining assets be used exclusively for section 501(c)(3) exempt purposes, such as charitable, religious, educational, and/or scientific purposes. Depending on your entity type and the state in which you are formed, this requirement may be satisfied by the operation of state law. Does your organizing document meet this requirement? What are these clauses for? Purpose Clause To qualify for tax-exempt status, your nonprofit must be limited to doing things that are tax-exempt. Namely, it must be organized exclusively for charitable, religious, educational, or scientific purposes. To keep your nonprofit accountable to this extent, the IRS requires that you include a purpose clause in your Articles of Incorporation that explicitly states this requirement. This is not required of any other type of corporation, so check your articles to make sure you, or whoever you trusted to file your nonprofit at the state level, included such a clause. For example: “The Corporation is organized exclusively for charitable, scientific, and educational purposes, pursuant to Section 50l(c)(3) of the Internal Revenue Code of 1986, as amended, and its successors, and regulations issued thereunder, including but not limited to [include your specific purpose, such as rescuing animals, feeding the hungry, etc. here]” Dissolution Clause The IRS also wants to make sure that if your nonprofit were to stop operating for some reason, the proceeds don’t go into your, or your directors, personal bank accounts. Therefore, you’re required to include a dissolution clause in your articles of incorporation. This dissolution clause mandates that, if your nonprofit were to dissolve, your assets would either a) be distributed to other nonprofit organizations or b) they will be distributed appropriately by the government. For example: “Upon the winding up and dissolution of the Corporation, the assets of the Corporation remaining after payment of, or provision for payment of, all debts and liabilities of the Corporation, shall be distributed to an organization or organizations, as determined by the Board of Directors, recognized as exempt under Section 501(c)(3) of the Code or any successor provision, and used exclusively to accomplish the purposes for which this Corporation is organized.” Ensuring these Clauses are in Your Nonprofit Articles of Incorporation These clauses seem fairly simple. Why do so many nonprofit leaders miss them? The vast majority of new nonprofit leaders miss these clauses because these must be filed at the state level, but you don’t learn these must be in your Articles of Incorporation until you go to fill out the federal form. You cannot amend your articles at the federal level, so either a nonprofit leader will miss these requirements entirely and be automatically rejected, or they’ll have to create or amend their Articles of Incorporation once they are ready to file at the federal level, which can cost additional weeks and hundreds of dollars in some states. What if I’ve already filed,