Why You Should Get 501(c)(3) Status Before the Year Ends

When it comes to getting good information on the topic of 501(c)(3) status for churches and ministries, the Internet leads the way in creating confusion.  It seems that just about everyone has an opinion that is either in favor or opposition to it.  One would imagine with so much written about the subject that finding good information would be a walk in the park.

What is 501(c)(3)?

So, what exactly is 501(c)(3) status? Why is there so much talk about it?  501(c)(3) is actually a section of the tax code that is part of the greater section 501 that lists who qualifies to receive tax exempt status, and it includes churches, ministries, schools, hospitals and other organizations.  The (c)(3) part of section 501 lists the requirements that need to be met in order for an organization to be tax exempt.  Are you certain that your ministry operates in a manner that is consistent with the requirements of section 501(c)(3)?  I often hear people say that they believe a church should never get 501(c)(3) status and they even encourage others to either not apply or to turn theirs in.  This belief comes from a fundamental misunderstanding of the law and how it applies to churches.  They are under the false impression that applying for 501(c)(3) status will make their church or ministry subject to the IRS.  It is a matter of settled law that churches and ministries are subject to IRS regulation even in the absence of specific recognition of 501(c)(3) status.  It is cemented by recent court rulings such as JACK LANE TAYLOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, and BRANCH MINISTRIES, INC. Petitioner v. CHARLES O. ROSSOTTI.  These two cases establish two things.

1. That there is no provision in the law that grants a church immunity from meeting the requirements of section 501(c)(3) if that church or ministry wants to be tax exempt.  
2. The presumption of tax exempt status does not exist unless the church has been officially recognized by the IRS to meet the requirements of section 501(c)(3). I will explain this one later.

But does that regulation mean that the IRS can invade your church's freedom of religion, speech and doctrinal teachings?  The answer is, "Absolutely NOT."  In fact, there is no law or regulation in existence that limits what ministers can preach from the pulpit.   Even more so, the courts have upheld the church's right to free speech from the pulpit even when the IRS has attempted to regulate it. Despite these facts there are some groups that teach the contrary by saying that any church that gets 501(c)(3) status must sign a waiver to forfeit their 1st Amendment Freedom of Speech rights.  At best, they are mislead and at worst, flat out dishonest.

Three compelling reasons to get it before the year ends

There are many good reasons to get 501(c)(3) status.  They range from getting preferred postage rates, property tax exemptions, and the ability to apply for sales tax exemption to enabling you to qualify for many grants.
While these benefits are great to have, let me share three compelling reasons to get 501(c)(3) status before the year ends.

1. Donors who want to give large gifts will ask for it:  I have always preached that the biggest part of receiving a blessing is being ready for it when it comes.  As the end of the year approaches, high net worth individuals look for places to make large contributions.  Because of the size of the contribution, they want to be sure that their contribution will be tax deductible.  Without the 501(c)(3) you cannot guarantee them that it will be.  As promised earlier, here is the further explanation tax how tax exempt status cannot be presumed without official tax exempt status.  In the case, Branch Ministries v. Rossotti, the court ruled that while a church does not have to apply for 501(c)(3) status in order to be tax exempt, the presumption cannot be established unless the IRS gives a ruling that the church meets all of the 501(c)(3) criteria.  So what does this mean?  The court elaborated by saying that when a taxpayer makes a contribution to a church that has not received 501(c)(3) status, the taxpayer has the burden of proof on him/her to establish before the IRS that the church in fact meets all of the 501(c)(3) criteria.  When the IRS audits a taxpayer's tax return, it looks at the contributions to the church and checks in publication 78 to verify if the church has 501(c)(3) status.  If the church does not appear in that publication, then the taxpayer will have to prove that the church meets all of the 501(c)(3) criteria.  This "burden of proof" that is placed on the taxpayer will discourage high net worth individuals from giving to your church.
    
2. Increased reporting requirement:  The application for 501(c)(3) status requires you to list all of your past, present and future activities.  Therefore, the longer you wait, the more history you will have to report. 
3. The IRS fee may go up:   Internal Revenue manual 1.32.19.5.3 requires the IRS to review and update their fees every two years.  The last time it reviewed it's fees was in 2009 and they went up.  The user fees assessed by the IRS are calculated by the costs incurred by the exempt organizations unit to process the form.  While it is possible that the fee may stay the same it is more likely that it will go up.  I have never seen an instance in which it has gone down.

Is one 501(c)(3) better than another?

As you consider your options on the 501(c)(3), keep in mind that the 501(c)(3) is your public record.  It is of utmost importance that your public record accurately reflect your heart, vision, doctrines and most of all contain provisions that protect you from certain public policies that are contrary to God's Word.  Never buy into the concept of quick and easy 501(c)(3) status.  There are groups that teach and promote keeping the 501(c)(3) application simple by taking a cookie cutter approach to getting approved and then making changes to your bylaws and other important corporate documents.  This is not only deceptive, but it is harmful to your ministry because more often than not the changes are not made and even if they are, IRS letter 947 requires your church to submit those changes for further reconsideration.  This is a bad proposition that will cost you more time and money in the long run.

Part two of the article "Why You Should Get 501(c)(3) Status Before the Year Ends."
What a strange question.  What do you mean?  Are there different types of 501(c)(3)'s?  To best answer that question, let me refer you back to a motor oil commercial.  It featured two men in a car leaving a plume of smoke behind them.  One man asked if he used the proper brand of motor oil and the driver's response was, "Motor oil is motor oil."  Apparently, it is not.  The oil the driver used burned easily and the evidence was obvious.
Is it the same with your ministry’s 501(c)(3)?  The answer is yes.  In all of the years I have been involved in ministry and consultation, I have had countless conversations with leaders who were told by the person preparing their 501(c)(3) application that it was better to go "middle of the road" and keep their application simple so that they could get approved quickly.  I cringe every time I hear that because your 501(c)(3) is your church's public record.

What is your public record and why is it so important?

As stated in my previous article, in order for your church to be able to guarantee that contributions to your ministry are tax deductible, you must get 501(c)(3) status.  When you apply for the 501(c)(3), the entire application is a public record that anyone in the general public can look up and read.  Section 6104(d), as regulated by the IRS, requires that the following records of your 501(c)(3) be made available for public inspection.
Your entire 501(3)(3) application which includes:

1. Articles of incorporation
2. Constitution and bylaws
3. Doctrines
4. Your ministry's form of government
5. Schedule A and all of the supporting facts such as your ordination program details

Are you certain that your 501(c)(3) application on record with the IRS accurately reflects your heart, vision and ministry government?  Does it reflect the way you run your ministry?  Unfortunately, many ministries have fallen prey to the quick and easy 501(c)(3) mills that offer super, super low prices and fast, "one-week" preparation.   They do this because they take a cookie cutter approach due to the fact that they are simply form preparers that do not consult with you to hear your heart and strive to make your dreams a reality.  While their approach may be tempting, the long term consequences may leave your ministry with a limp.  Remember the motor oil commercial?  The driver's goal was to get the motor oil in the car without considering if it would protect his car's engine for the long term.  So, he chose the cheapest oil money could buy.  The consequence was the breakdown of his car, as all could clearly see.
Your 501(c)(3) represents your life's goal and work.  It should take time and cover an extensive number of considerations.  This requires one-on-one consulting, interviews by telephone and extensive reviews by more than one person. Never buy into the concept of quick and easy 501(c)(3) status.  This is not only deceptive, but it is harmful to your ministry because more often than not, the changes are not made and even if they are, IRS letter 947 requires your church to submit those changes for further reconsideration.  This is a bad proposition that will cost you more time and money in the long run.

Ten things your 501(c)(3) should reflect

Let me give you a quick list of some things that should be in your 501(c)(3) application.  This list is not comprehensive, but should give you an idea of what should be in your application.

1. A purpose statement that allows your ministry to expand into activities that may not be on your radar today (Ordinations, colleges, universities, international activities, expanding and creating a network of churches and ministries, etc.)
2. Ecclesiastical authority of the founder and proper accountability that prevents him/her from being voted out without cause (This is super important; what you don't know can be detrimental!)
3. Mutual interest language to protect the board of directors from defamation lawsuits should a member need to face disciplinary action or removal
4. Standard of living requirements for members and directors
5. Doctrinal statements that protect the church from future public policy that runs contrary to the ministry's beliefs and practices
6. A policy for the correct handling of donated property
7. Foreign activities policy and the office of foreign asset control
8. Conflict of interest policy
9. Reimbursement policy
10. Appointment and removal of board of directors (elders, trustees)  Who does it?