Church Finances and Business: Starting a New Church

I get emails —

Jay, I am involved in a group of individuals that is starting a house church. We want to give the members an opportunity to tithe as well as support other activities. The research that I have done on the IRS website basically leads me to believe that we need no special registration like 501-3.C to allow our members to deduct their contributions. We would only need to track and provide receipts to the individuals that contribute $250 or more in aggregate. Am I correct?

Also what are feelings about incorporation? I know that we only would need to be incorporated if we wanted to purchase real estate or enter into to binding contracts in the name of the church.

I’m a tax lawyer, and even tax lawyers get confused with these questions. But I do quite a lot of work for churches and have had to work through the rules many times. Here are the answers —

* Donations are deductible only if given to an organization described in section 501(c)(3) of the Internal Revenue Code. This section includes many organizations, including many but not all churches.

* To qualify under 501(c)(3), churches must be organized as a tax exempt organization. This means the corporate charter (articles of incorporation) have to limit the church’s activities to activities recognized as charitable and that, on dissolution, the church’s assets will be paid to another 501(c)(3) organization (not the members!)

* Where many get confused is the fact that churches don’t have to obtain a ruling from the IRS to be considered tax exempt. All other charities aren’t 501(c)(3) organizations unless they’ve received a ruling, normally obtained by filing a Form 1023. Churches don’t have to seek a ruling, but they have to meet the same standards.

* State laws vary, but as a rule, this means being incorporated. Some states have special statutes for churches, while others allow churches to organize under the general nonprofit corporation statute. There are other good reasons to incorporate —

– In many states, liabilities are shared by all members of an unincorporated association. That means a bank lending to an unincorporated church could collect the full amount from every member! Or if someone got hurt on premises, every member could be fully liable for the loss.

– In most states, a church can’t have clear title to real estate if it doesn’t incorporate.

– If you any employees, you have to obtain a tax number from the IRS and pay payroll taxes.

* Churches that incorporate need to be careful to draw their papers wisely.

– No creeds! Don’t write requirements regarding instrumental music or weekly communion into the documents, because this is sheer creedalism — and an effort to compromise congregational autonomy.

– Provide a means of succession for leadership. Under the typical state nonprofit corporation act, you have to appoint an initial board of directors. Some states have special church incorporation statutes that create trustees. If the charter names the initial board and you don’t specify how new members get appointed, you create a mess. You should say that the board or the trustees are the elders as from time to time in office. You should provide for what happens if there are no elders.

– Include the required IRS language. See http://www.irs.gov/charities/charitable/article/0,,id=122728,00.html and links. IRS Publication 557 is very detailed. Check out the IRS Tax Guide for Churches and Religious Organizations.

* Once you’ve incorporated your church, you should decide whether to file for a ruling. It’s not essential unless you need to demonstrate your 501(c)(3) status to a major donor or to a grant-making body. Filing assures you that your papers are all properly done. But most churches don’t file.

* If you are going to open a bank account, file a 1023, have an employee, or make payments subject to a 1099 (such as payments over $600 to a visiting preacher), you have to obtain a Taxpayer Identification Number. This may be done at this site.

* If you have an employee, you need a payroll service or someone familiar with the rules to file payroll tax returns. State law may require unemployment insurance and worker compensation payments.

* Be sure to buy insurance. There are companies that specialize in churches.

* Once you have a tax number, you can open a church bank account. Don’t ever commingle personal funds with church funds. It’s illegal and wrong. The church will need to authorize someone to handle the funds. Deposits should be handled by someone who doesn’t write checks — so it’s harder for either to embezzle. Church embezzlement is very common — and always by someone well trusted.

This is hardly a complete guide to getting started, but I hope it helps. Be sure to consult a local CPA or attorney. The laws vary a lot from state to state.

All legal discussions are informational only, do not create a lawyer-client relationship, and may not be relied on. Unless expressly stated otherwise on this website, (1) nothing contained in this website was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended; (2) any written statement contained on this website relating to any federal tax transaction or matter may not be used by any person to support the promotion or marketing or to recommend any federal tax transaction or matter; and (3) any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor with respect to any federal tax transaction or matter contained in this website. No one, without our express written permission, may use any part of this website in promoting, marketing or recommending an arrangement relating to any federal tax matter to one or more taxpayers.

About Jay F Guin

My name is Jay Guin, and I’m a retired elder. I wrote The Holy Spirit and Revolutionary Grace about 18 years ago. I’ve spoken at the Pepperdine, Lipscomb, ACU, Harding, and Tulsa lectureships and at ElderLink. My wife’s name is Denise, and I have four sons, Chris, Jonathan, Tyler, and Philip. I have two grandchildren. And I practice law.
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5 Responses to Church Finances and Business: Starting a New Church

  1. Jerry says:

    Thanks Jay that does help us quite a bit.

  2. Gary Cummings says:

    Jay,
    SO a church does not have to be 501c3 to be tax exempt, but a person must give to a 501c3 organization to have a tax deduction. Is that right?

  3. Jay Guin says:

    Sort of.

    Many different kinds of private organizations are tax exempt — meaning that they don't generally pay taxes on their income. Charities are the most obvious type, but social clubs and some credit unions are tax exempt.

    However, only organizations described in section 501(c)(3) are both tax exempt and eligible to receive deductible contributions.

    And other than churches, an organization isn't a 501(c)(3) organization until it receives a ruling. But a church doesn't have to get a ruling to be a 501(c)(3) organization. However, it does have to satisfy the rules for being a 501(c)(3).

    Legitimate churches easily meet most of the tests more or less automatically, but they only meet the requirement to be "organized" as a 501(c)(3) if their formation documents are properly drafted.

  4. mark says:

    I'm a corporate president of a church in the Portland Oregon area with less than 18 people the church is valued about 1.2 million. Our mortgage is less than is 220 dollars a month with about 8000 left to pay. We have rental that brings in about 800 month the church raises about 24,000 a year. No staff. Our finances are sound. Is there any church of Christ organizations that can help us church plant within our own building?

    If that's not possible, in selling the building do our by laws need to reflect where the money goes?

  5. Jay Guin says:

    I'm confident that something like a church plant where you are could happen. I suggest you get in contact with Kairos, Mission Alive, and Stadia.

    You likely should start with Kairos, as Stan Granberg, who heads the effort, lives in Portland. http://partner.kairoschurchplanting.org/

    If you wind up selling the building, 501(c)(3) regulations require that the proceeds go to another 501(c)(3) organization. I think the appropriate choice is an organization with similar aims to your church, such as a church plant in your area or a church planting organization.

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