Internal Revenue

Internal RevenueService
Service
Tax Exempt
Tax Exemptand
andGovernment
Government Entities
Entities
Exempt Organizations
Exempt Organizations

tax guide for

Churches
and
Religious
Organizations
benefits and responsibilities
under the federal tax law
Congress has enacted special tax laws applicable to For more detailed tax information, the IRS has assistance
churches, religious organizations, and ministers in programs and tax information products for churches
recognition of their unique status in American society and religious organizations, as noted in the back of this
and of their rights guaranteed by the First Amendment publication. Most IRS publications and forms can be
of the Constitution of the United States. Churches and downloaded from the IRS Web site at www.irs.gov, or
religious organizations are generally exempt from ordered by calling toll-free (800) 829-3676. Specialized
income tax and receive other favorable treatment under information can be accessed through the Exempt
the tax law; however, certain income of a church or Organizations (EO) Web site under the IRS Tax Exempt
religious organization may be subject to tax, such as and Government Entities division via www.irs.gov/eo or
income from an unrelated business. by calling EO Customer Account Services toll-free at
(877) 829-5500.
The Internal Revenue Service (IRS) offers this quick
reference guide of federal tax law and procedures for The IRS considers this publication a living document,
churches and religious organizations to help them one that will be revised to take into account future devel-
voluntarily comply with tax rules. The contents of this opments and feedback. Comments on the publication
publication reflect the IRS interpretation of tax laws may be submitted to the IRS at the following address:
enacted by Congress, Treasury regulations, and court Internal Revenue Service
decisions. The information given is not comprehensive, 1111 Constitution Avenue, NW
however, and does not cover every situation. Thus, it Washington, DC 20224
is not intended to replace the law or be the sole source Attn: T:EO:CE&O
of information. The resolution of any particular issue
may depend on the specific facts and circumstances
of a given taxpayer. In addition, this publication covers
subjects on which a court may have made a decision
more favorable to taxpayers than the interpretation by
the IRS. Until these differing interpretations are
resolved by higher court decisions, or in some other
way, this publication will present the interpretation of
the IRS.
Table of Contents

Tax-Exempt Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Payment Of Employee Business Expenses . . . . . . .16

Recognition of Tax-Exempt Status . . . . . . . . . . . . . . . . . . . .3 Accountable Reimbursement Plan . . . . . . . . . . . . . . . . . . .16

Applying for Tax-Exempt Status . . . . . . . . . . . . . . . . . . . . . . .3 Non-accountable Reimbursement Plan . . . . . . . . . . . . . .16
Public Listing of Tax-Exempt Organizations . . . . . . . . . .4
Recordkeeping Requirements . . . . . . . . . . . . . . . . . . . . . .17

Jeopardizing Tax-Exempt Status . . . . . . . . . . . . . . . . . . . .5 Books of Accounting and Other Types of Records . . .17

Inurement and Private Benefit . . . . . . . . . . . . . . . . . . . . . . . .5 Length of Time to Retain Records . . . . . . . . . . . . . . . . . . .17

Substantial Lobbying Activity . . . . . . . . . . . . . . . . . . . . . . . . .5
Political Campaign Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Filing Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Information and Tax Returns—
Unrelated Business Income Tax (UBIT) . . . . . . . . . .12 Forms to File and Due Dates . . . . . . . . . . . . . . . . . . . . . .18
Net Income Subject to the UBIT . . . . . . . . . . . . . . . . . . . .12
Examples of Unrelated Trade or Charitable Contributions—
Business Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 Recordkeeping, Substantiation and
Tax on Income-Producing Activities . . . . . . . . . . . . . . . . .13 Disclosure Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

Recordkeeping Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

Employment Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Substantiation Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Social Security and Medicare Taxes—
Disclosure Rules that Apply to
Federal Insurance Contributions Act (FICA) . . . . .14
Quid Pro Quo Contributions . . . . . . . . . . . . . . . . . . . . . . .20
Federal Unemployment Tax Act (FUTA) . . . . . . . . . . . .14
Exceptions to Disclosure Statement . . . . . . . . . . . . . . . . .21

Special Rules for

Special Rules Limiting
Compensation of Ministers . . . . . . . . . . . . . . . . . . . . . . . . .15
IRS Authority to Audit a Church . . . . . . . . . . . . . . . . .22
Withholding Income Tax for Ministers . . . . . . . . . . . . . .15
Tax Inquiries and Examinations of Churches . . . . . . . .22
Parsonage or Housing Allowances . . . . . . . . . . . . . . . . . . .15
Audit Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
Social Security and Medicare Taxes—
Federal Insurance Contributions Act (FICA) Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23

vs. SECA (Self-Employment Contributions

Help From The IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Act) Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
IRS Tax Publications to Order . . . . . . . . . . . . . . . . . . . . . . .24
IRS Customer Service . . . . . . . . . . . . . . . . . .inside back cover

EO Customer Service . . . . . . . . . . . . . . . . . . .inside back cover

EO Web Site . . . . . . . . . . . . . . . . . . . . . . . . . . . .inside back cover

1
Introduction

T
his publication explains the benefits Because special tax rules apply to
and the responsibilities under the churches, it is important to distinguish
federal tax system for churches and churches from other religious organiza-
religious organizations. The term church tions. Therefore, when this publication
is found, but not specifically defined, in uses the term “religious organizations,” it
the Internal Revenue Code (IRC). The is not referring to churches or integrated
term is not used by all faiths; however, in auxiliaries. Religious organizations that
an attempt to make this publication easy are not churches typically include nonde-
to read, we use it in its generic sense as a nominational ministries, interdenomina-
place of worship including, for example, tional and ecumenical organizations, and
mosques and synagogues. With the excep- other entities whose principal purpose is
tion of the special rules for church audits, the study or advancement of religion.
the use of the term church throughout this
Churches and religious organizations may
publication also includes conventions
be legally organized in a variety of ways
and associations of churches as well as
under state law, such as unincorporated
integrated auxiliaries of a church.
associations, nonprofit corporations,
corporations sole, and charitable trusts.

Certain terms used throughout this

publication—church, integrated auxiliary
of a church, minister, and IRC section
501(c)(3)— are defined in the Glossary
on page 23.

2
Tax-Exempt Status
Churches and religious organizations, like many other Church Exemption Through
charitable organizations, qualify for exemption from a Central/Parent Organization
federal income tax under IRC section 501(c)(3) and A church with a parent organization may wish to contact
are generally eligible to receive tax-deductible contri- the parent to see if it has a group ruling. If the parent
butions. To qualify for tax-exempt status, such an holds a group ruling, then the IRS may already recognize
organization must meet the following requirements the church as tax exempt. Under the group exemption
(covered in greater detail throughout this publication): process, the parent organization becomes the holder of
■ the organization must be organized and operated a group ruling that identifies other affiliated churches or
exclusively for religious, educational, scientific, or other other affiliated organizations. A church is recognized as
charitable purposes, tax exempt if it is included in a list provided by the par-
■ net earnings may not inure to the benefit of any ent organization. The parent is then required to submit
private individual or shareholder, an annual group exemption update to the IRS in which
it provides additions, deletions, and changes within the
■ no substantial part of its activity may be attempting
group. If the church or other affiliated organization is
to influence legislation,
included on such a list, it does not need to take further
■ the organization may not intervene in political action to obtain recognition of tax-exempt status.
campaigns, and
An organization that is not covered under a group
■ the organization’s purposes and activities may not ruling should contact its parent organization to see if it
be illegal or violate fundamental public policy. is eligible to be included in the parent’s application for
the group ruling. For general information on the group
exemption process, see Revenue Procedure 80-27,
Recognition of Tax-Exempt Status 1980-1 C.B. 677.
Automatic Exemption for Churches
Religious Organizations
Churches that meet the requirements of IRC section
Unlike churches, religious organizations that wish
501(c)(3) are automatically considered tax exempt and
to be tax exempt generally must apply to the IRS for
are not required to apply for and obtain recognition of
tax-exempt status unless their gross receipts do not
tax-exempt status from the IRS.
normally exceed $5,000 annually.
Although there is no requirement to do so, many
churches seek recognition of tax-exempt status from the
IRS because such recognition assures church leaders, Applying for Tax-Exempt Status
members, and contributors that the church is recog-
Employer Identification Number (EIN)
nized as exempt and qualifies for related tax benefits.
For example, contributors to a church that has been Every tax-exempt organization, including a church,
recognized as tax exempt would know that their contri- should have an employer identification number (EIN),
butions generally are tax-deductible. whether or not the organization has any employees.
There are many instances in which an EIN is necessary.
For example, a church needs an EIN when it opens a
bank account, in order to be listed as a subordinate in
a group ruling, or if it files returns with the IRS (e.g.,
Forms W-2, 1099, 990-T).

3
An organization that does not have an EIN should file IRS Approval of Exemption Application
Form SS-4, Application for Employer Identification If the application for tax-exempt status is approved, the
Number, in accordance with the instructions. If the IRS will notify the organization of its status, any require-
organization is submitting IRS Form 1023, Application ment to file an annual information return, and its eligi-
for Recognition of Exemption Under Section 501(c)(3) bility to receive deductible contributions. The IRS does
of the Internal Revenue Code (see below), Form SS-4 not assign a special number or other identification as evi-
should be included with the application. dence of an organization’s tax-exempt status.
Application Form
Organizations, including churches and religious organi- Public Listing of
zations, that wish to be recognized as tax exempt under
IRC section 501(c)(3) must use Form 1023.
Tax-Exempt Organizations
A religious organization must submit its application The IRS lists organizations that are qualified to receive
within 27 months from the end of the month in which tax-deductible contributions in IRS Publication 78,
the organization is formed in order to be considered Cumulative List of Organizations Described in Section
tax exempt and qualified to receive deductible contribu- 170(c) of the Internal Revenue Code of 1986. This publi-
tions as of the date the organization was formed. On the cation is sold to the public through the Superintendent
other hand, a church may obtain recognition of exemp- of Documents, U.S. Government Printing Office,
tion for time periods prior to the date of its request for Washington, DC. Publication 78 can also be downloaded
tax-exempt status, even if it does not submit its applica- from the IRS Web site at www.irs.gov. Note that not
tion within 27 months of formation. every organization that is eligible to receive tax-deductible
contributions is listed in Publication 78. For example,
Cost for applying for exemption. The IRS is required
churches that have not applied for recognition of tax-
to collect a non-refundable fee from any organization
exempt status are not included in the publication. Only
seeking a determination of tax-exempt status under IRC
the parent organization in a group ruling is included by
section 501(c)(3). Although churches are not required by
name in Publication 78.
law to file an application for exemption, if they choose to
do so voluntarily, they are required to pay the fee for If you have questions about listing an organization,
determination. correcting an erroneous entry, or deleting a listing in
Publication 78, contact EO Customer Account Services
The fee must be submitted with Form 1023; otherwise,
toll-free at (877) 829-5500.
the application will be returned to the submitter. Fees
change periodically and are listed on IRS Form 8718,
User Fee for Exempt Organization Determination Letter
Request, which is used to transmit both the appropriate
fee and the application for exemption. The most recent
user fee can be found at the Exempt Organizations (EO)
Web site under the IRS Tax Exempt and Government
Entities division via www.irs.gov/eo or by calling EO
Customer Account Services toll-free at (877) 829-5500.

4
Jeopardizing Tax-Exempt Status
All IRC section 501(c)(3) organizations, including church- Excess benefit transactions. In cases where an IRC
es and religious organizations, must abide by certain rules: section 501(c)(3) organization provides an excess eco-
■ their net earnings may not inure to any private nomic benefit to an insider, both the organization and
shareholder or individual, the insider have engaged in an excess benefit transaction.
The IRS may impose an excise tax on any insider who
■ they must not provide a substantial benefit to private
improperly benefits from an excess benefit transaction,
interests,
as well as on organization managers who participate in
■ they must not devote a substantial part of their such a transaction knowing that it is improper. An insider
activities to attempting to influence legislation, who benefits from an excess benefit transaction is also
■ they must not participate in, or intervene in, any required to return the excess benefits to the organiza-
political campaign on behalf of (or in opposition to) tion. Detailed rules on excess benefit transactions are
any candidate for public office, and contained in the Code of Federal Regulations, Title 26,
■the organization’s purposes and activities may not sections 53.4958-0 through 53.4958-8.
be illegal or violate fundamental public policy.
Private Benefit
An IRC section 501(c)(3) organization’s activities must
Inurement and Private Benefit be directed exclusively toward charitable, educational,
religious, or other exempt purposes. Such an organiza-
Inurement to Insiders
tion’s activities may not serve the private interests of any
Churches and religious organizations, like all exempt individual or organization. Rather, beneficiaries of an
organizations under IRC section 501(c)(3), are prohibit- organization’s activities must be recognized objects of
ed from engaging in activities that result in inurement of charity (such as the poor or the distressed) or the com-
the church’s or organization’s income or assets to insiders munity at large (for example, through the conduct of
(i.e., persons having a personal and private interest in the religious services or the promotion of religion). Private
activities of the organization). Insiders could include the benefit is different from inurement to insiders. Private
minister, church board members, officers, and in certain benefit may occur even if the persons benefited are not
circumstances, employees. Examples of prohibited inure- insiders. Also, private benefit must be substantial in
ment include the payment of dividends, the payment of order to jeopardize tax-exempt status.
unreasonable compensation to insiders, and transferring
property to insiders for less than fair market value. The
prohibition against inurement to insiders is absolute; Substantial Lobbying Activity
therefore, any amount of inurement is, potentially,
grounds for loss of tax-exempt status. In addition, the In general, no organization, including a church, may
insider involved may be subject to excise tax. See the qualify for IRC section 501(c)(3) status if a substantial
following section on Excess benefit transactions. Note part of its activities is attempting to influence legislation
that prohibited inurement does not include reasonable (commonly known as lobbying). An IRC section
payments for services rendered, payments that further 501(c)(3) organization may engage in some lobbying, but
tax-exempt purposes, or payments made for the fair too much lobbying activity risks loss of tax-exempt status.
market value of real or personal property.

5
Legislation includes action by Congress, any state legisla- religious organization is subject to an excise tax equal to five per-
ture, any local council, or similar governing body, with cent of its lobbying expenditures for the year in which it ceases to
respect to acts, bills, resolutions, or similar items (such as qualify for exemption. Further, a tax equal to five percent of the
legislative confirmation of appointive offices), or by the lobbying expenditures for the year may be imposed against organi-
public in a referendum, ballot initiative, constitutional zation managers, jointly and severally, who agree to the making of
amendment, or similar procedure. It does not include such expenditures knowing that the expenditures would likely result
actions by executive, judicial, or administrative bodies. in loss of tax-exempt status.

A church or religious organization will be regarded as

Expenditure test. Although churches are not eligible,
attempting to influence legislation if it contacts, or urges
religious organizations may elect the expenditure test
the public to contact, members or employees of a legisla-
under IRC section 501(h) as an alternative method for
tive body for the purpose of proposing, supporting, or
measuring lobbying activity. Under the expenditure test,
opposing legislation, or if the organization advocates the
the extent of an organization’s lobbying activity will not
adoption or rejection of legislation.
jeopardize its tax-exempt status, provided its expendi-
Churches and religious organizations may, however, tures, related to such activity, do not normally exceed an
involve themselves in issues of public policy without the amount specified in IRC section 4911. This limit is gen-
activity being considered as lobbying. For example, erally based upon the size of the organization and may
churches may conduct educational meetings, prepare not exceed $1,000,000.
and distribute educational materials, or otherwise consid-
Religious organizations electing to use the expenditure
er public policy issues in an educational manner without
test must file IRS Form 5768, Election/Revocation of
jeopardizing their tax-exempt status.
Election by an Eligible IRC Section 501(c)(3) Organization
Measuring Lobbying Activity To Make Expenditures To Influence Legislation, at any
time during the tax year for which it is to be effective.
Substantial part test. Whether a church’s or religious
The election remains in effect for succeeding years
organization’s attempts to influence legislation constitute
unless it is revoked by the organization. Revocation of
a substantial part of its overall activities is determined on
the election is effective beginning with the year following
the basis of all the pertinent facts and circumstances in
the year in which the revocation is filed. Religious organ-
each case. The IRS considers a variety of factors, includ-
izations may wish to consult their tax advisors to deter-
ing the time devoted (by both compensated and volun-
mine their eligibility for, and the advisability of, electing
teer workers) and the expenditures devoted by the
the expenditure test.
organization to the activity, when determining whether
the lobbying activity is substantial. Churches must use Consequences of excessive lobbying activity. Under the expenditure
the substantial part test since they are not eligible to use test, a religious organization that engages in excessive lobbying
the expenditure test described in the next section. activity over a four-year period may lose its tax-exempt status, mak-
ing all of its income for that period subject to tax. Should the organ-
Consequences of excessive lobbying activity. Under the substantial
ization exceed its lobbying expenditure dollar limit in a particular
part test, a church or religious organization that conducts excessive
year, it must pay an excise tax equal to 25 percent of the excess.
lobbying activity in any taxable year may lose its tax-exempt status,
resulting in all of its income being subject to tax. In addition, a

6
Political Campaign Activity However, for their organizations to remain tax exempt
under IRC section 501(c)(3), religious leaders cannot
Under the Internal Revenue Code, all IRC section make partisan comments in official organization publica-
501(c)(3) organizations, including churches and religious tions or at official church functions. To avoid potential
organizations, are absolutely prohibited from directly or attribution of their comments outside of church func-
indirectly participating in, or intervening in, any political tions and publications, religious leaders who speak or
campaign on behalf of (or in opposition to) any candidate write in their individual capacity are encouraged to clear-
for elective public office. Contributions to political cam- ly indicate that their comments are personal and not
paign funds or public statements of position (verbal or intended to represent the views of the organization. The
written) made by or on behalf of the organization in favor following are examples of situations involving endorse-
of or in opposition to any candidate for public office ments by religious leaders.
clearly violate the prohibition against political campaign
activity. Violation of this prohibition may result in denial Example 1: Minister A is the minister of Church J and is well
or revocation of tax-exempt status and the imposition of known in the community. With their permission, Candidate T pub-
certain excise tax. lishes a full-page ad in the local newspaper listing five prominent

Certain activities or expenditures may not be prohibited ministers who have personally endorsed Candidate T, including

depending on the facts and circumstances. For example, Minister A. Minister A is identified in the ad as the minister of

certain voter education activities (including the presenta- Church J. The ad states, “Titles and affiliations of each individual

tion of public forums and the publication of voter educa- are provided for identification purposes only.” The ad is paid

tion guides) conducted in a non-partisan manner do not for by Candidate T’s campaign committee. Since the ad was not

constitute prohibited political campaign activity. In addi- paid for by Church J, the ad is not otherwise in an official publica-

tion, other activities intended to encourage people to tion of Church J, and the endorsement is made by Minister A in a

participate in the electoral process, such as voter regis- personal capacity, the ad does not constitute campaign intervention

tration and get-out-the-vote drives, would not constitute by Church J.

prohibited political campaign activity if conducted in a

Example 2: Minister B is the minister of Church K. Church K pub-
non-partisan manner. On the other hand, voter educa-
lishes a monthly church newsletter that is distributed to all church
tion or registration activities with evidence of bias that:
members. In each issue, Minister B has a column titled “My
(a) would favor one candidate over another; (b) oppose
Views.” The month before the election, Minister B states in the
a candidate in some manner; or (c) have the effect of
“My Views” column, “It is my personal opinion that Candidate U
favoring a candidate or group of candidates, will consti-
should be reelected.” For that one issue, Minister B pays from his
tute prohibited participation or intervention.
personal funds the portion of the cost of the newsletter attributable

Individual Activity by Religious Leaders to the “My Views” column. Even though he paid part of the cost
of the newsletter, the newsletter is an official publication of the
The political campaign activity prohibition is not intend-
church. Since the endorsement appeared in an official publication
ed to restrict free expression on political matters by lead-
of Church K, it constitutes campaign intervention attributed to
ers of churches or religious organizations speaking for
Church K.
themselves, as individuals. Nor are leaders prohibited
from speaking about important issues of public policy.

7
Example 3: Minister C is the minister of Church L and is well candidate is introduced and in communications concern-
known in the community. Three weeks before the election, he ing the candidate’s attendance.), and
attends a press conference at Candidate V’s campaign headquarters
■ no political fundraising occurs.
and states that Candidate V should be reelected. Minister C does
not say he is speaking on behalf of his church. His endorsement is Equal opportunity to participate. Like any other
reported on the front page of the local newspaper and he is identi- IRC section 501(c)(3) organization, in determining
fied in the article as the minister of Church L. Since Minister C did whether candidates are given an equal opportunity to
not make the endorsement at an official church function, in an offi- participate, a church or religious organization should
cial church publication or otherwise use the church’s assets, and consider the nature of the event to which each candidate
did not state that he was speaking as a representative of Church L, is invited, in addition to the manner of presentation. For
his actions did not constitute campaign intervention attributable to example, a church or religious organization that invites
Church L. one candidate to speak at its well attended annual ban-
quet, but invites the opposing candidate to speak at a
Example 4: Minister D is the minister of Church M. During regular sparsely attended general meeting, will likely be found
services of Church M shortly before the election, Minister D to have violated the political campaign prohibition,
preached on a number of issues, including the importance of voting even if the manner of presentation for both speakers
in the upcoming election, and concludes by stating, “It is important is otherwise neutral.
that you all do your duty in the election and vote for Candidate W.” Public forum. Sometimes a church or religious
Since Minister D’s remarks indicating support for Candidate W organization invites several candidates to speak at a
were made during an official church service, they constitute politi- public forum. A public forum involving several candi-
cal campaign intervention attributable to Church M. dates for public office may qualify as an exempt educa-
tional activity. However, if the forum is operated to show
Inviting a Candidate to Speak a bias for or against any candidate, then the forum would
be prohibited campaign activity, as it would be consid-
Depending on the facts and circumstances, a church or
ered intervention or participation in a political campaign.
religious organization may invite political candidates to
When an organization invites several candidates to speak
speak at its events without jeopardizing its tax-exempt
at a forum, it should consider the following factors:
status. Political candidates may be invited in their capa-
city as candidates, or individually (not as a candidate). ■ whether questions for the candidate are prepared and
presented by an independent nonpartisan panel,
Speaking as a candidate. Like any other IRC section
501(c)(3) organization, when a candidate is invited to ■ whether the topics discussed by the candidates cover a
speak at a church or religious organization event as a broad range of issues that the candidates would address
political candidate, the church or religious organization if elected to the office sought and are of interest to the
must take steps to ensure that: public,
■ it provides an equal opportunity to the political candi- ■ whether each candidate is given an equal opportunity
dates seeking the same office, to present his or her views on the issues discussed,
■ it does not indicate any support of or opposition to
the candidate (This should be stated explicitly when the

8
■ whether the candidates are asked to agree or disagree instance, a political candidate may be a public figure
with positions, agendas, platforms or statements of the because he or she: (a) currently holds, or formerly held,
organization, and public office; (b) is considered an expert in a non-politi-
■ whether a moderator comments on the questions cal field; or (c) is a celebrity or has led a distinguished
or otherwise implies approval or disapproval of the military, legal, or public service career. When a candidate
candidates. is invited to speak at an event in a non-candidate capaci-
ty, it is not necessary for the church or religious organiza-
The following are two examples of situations where a
tion to provide equal access to all political candidates.
church or religious organization invites a candidate(s) to
However, the church or religious organization must
speak before the congregation.
ensure that:
Example 1: Minister E is the minister of Church N. In the month ■ the individual speaks only in a non-candidate capacity,
prior to the election, Minister E invited the three Congressional ■ neither the individual nor any representative of the
candidates for the district in which Church N is located to address church makes any mention of his or her candidacy or the
the congregation, one each on three successive Sundays, as part of election, and
regular worship services. Each candidate was given an equal oppor-
■ no campaign activity occurs in connection with the
tunity to address and field questions on a wide variety of topics
candidate’s attendance.
from the congregation. Minister E’s introduction of each candidate
included no comments on their qualifications or any indication of a In addition, the church or religious organization should
preference for any candidate. The actions do not constitute politi- clearly indicate the capacity in which the candidate is
cal campaign intervention by Church N. appearing and should not mention the individual’s politi-
cal candidacy or the upcoming election in the communi-
Example 2: Minister F is the minister of Church O. The Sunday cations announcing the candidate’s attendance at the event.
before the November election, Minister F invited Senate Below are examples of situations where a public official
Candidate X to preach to her congregation during worship services. appears at a church or religious organization in an official
During his remarks, Candidate X stated, “I am asking not only for capacity, and not as a candidate.
your votes, but for your enthusiasm and dedication, for your will-
ingness to go the extra mile to get a very large turnout on Tuesday.” Example 1: Church P is located in the state capital. Minister G
Minister F invited no other candidate to address her congregation customarily acknowledges the presence of any public officials
during the Senatorial campaign. Because these activities took place present during services. During the state gubernatorial race,
during official church services, they are attributed to Church O. By Lieutenant Governor Y, a candidate, attended a Wednesday
selectively providing church facilities to allow Candidate X to speak evening prayer service in the church. Minister G acknowledged the
in support of his campaign, Church O’s actions constitute political Lieutenant Governor’s presence in his customary manner, saying,
campaign intervention. “We are happy to have worshiping with us this evening Lieutenant
Governor Y.” Minister G made no reference in his welcome to the
Speaking as a non-candidate. Like any other IRC sec- Lieutenant Governor’s candidacy or the election. Minister G’s actions
tion 501(c)(3) organization, a church or religious organi- do not constitute political campaign intervention by Church P.
zation may invite political candidates (including church
members) to speak in a non-candidate capacity. For

9
Example 2: Minister H is the minister of Church Q. Church Q is The following are examples of situations where churches
building a community center. Minister H invites Congressman Z, distribute voter guides.
the representative for the district containing Church Q, to attend
the groundbreaking ceremony for the community center. Example 1: Church R distributes a voter guide prior to elections.
Congressman Z is running for reelection at the time. Minister H The voter guide consists of a brief statement from the candidates
makes no reference in her introduction to Congressman Z’s candi- on each issue made in response to a questionnaire sent to all
dacy or the election. Congressman Z also makes no reference to his candidates for governor of State I. The issues on the questionnaire
candidacy or the election and does not do any fundraising while at cover a wide variety of topics and were selected by Church R based
Church Q. Church Q has not intervened in a political campaign. solely on their importance and interest to the electorate as a whole.
Neither the questionnaire nor the voter guide, through their con-
tent or structure, indicate a bias or preference for any candidate or
Voter Guides
group of candidates. Church R is not participating or intervening in
Like other IRC section 501(c)(3) organizations, some a political campaign.
churches and religious organizations undertake voter
education activities by distributing voter guides. Voter Example 2: Church S distributes a voter guide during an election
guides, generally, are distributed during an election campaign. The voter guide is prepared using the responses of
campaign and provide information on how all candidates candidates to a questionnaire sent to candidates for major public
stand on various issues. These guides may be distributed offices. Although the questionnaire covers a wide range of topics,
with the purpose of educating voters; however, they may the wording of the questions evidences a bias on certain issues.
not be used to attempt to favor or oppose candidates By using a questionnaire structured in this way, Church S is parti-
for public elected office. cipating or intervening in a political campaign.

A careful review of the following facts and circumstances

may help determine whether or not a church or religious Business Activity
organization’s publication or distribution of voter guides The question of whether an activity constitutes partici-
constitutes prohibited political campaign activity: pation or intervention in a political campaign may also
■ whether the candidates’ positions are compared to the arise in the context of a business activity of the church
organization’s position, or religious organization, such as the selling or renting
■ whether the guide includes a broad range of issues of mailing lists, the leasing of office space, or the accept-
that the candidates would address if elected to the ance of paid political advertising. (The tax treatment of
office sought, income from such unrelated business activities follows.)
In this context, some of the factors to be considered in
■ whether the description of issues is neutral,
determining whether the church or religious organiza-
■ whether all candidates for an office are included, and tion has engaged in prohibited political campaign activity
■ whether the descriptions of candidates’ positions include the following:
are either: ■ whether the good, service, or facility is available to the
- the candidates’ own words in response to questions, or candidates on an equal basis,
- a neutral, unbiased and complete compilation of all
candidates’ positions.

10
■ whether the good, service, or facility is available only In any case in which an initial tax is imposed against an
to candidates and not to the general public, organization, and the expenditures are not corrected
■ whether the fees charged are at the organization’s within the period allowed by law, an additional tax equal
customary and usual rates, and to 100 percent of the expenditures is imposed against
the organization. In that case, an additional tax is also
■ whether the activity is an ongoing activity of the organ-
imposed against the organization managers (jointly and
ization or whether it is conducted only for the candidate.
severally) who refused to agree to make the correction.
The additional tax on management is equal to 50 percent
Consequences of Political Campaign Activity
of the expenditures and may not exceed $10,000 with
When it participates in political campaign activity, a respect to any one expenditure.
church or religious organization jeopardizes both its
Correction. Correction of a political expenditure
tax-exempt status under IRC section 501(c)(3) and its
requires the recovery of the expenditure, to the extent
eligibility to receive tax-deductible contributions. In
possible, and establishment of safeguards to prevent
addition, it may become subject to an excise tax on its
future political expenditures.
political expenditures. This excise tax may be imposed in
addition to revocation, or it may be imposed instead of Please note that a church or religious organization that
revocation. Also, the church or religious organization engages in any political campaign activity also needs to
should correct the violation. determine whether it is in compliance with the appropri-
ate federal, state or local election laws, as these may dif-
Excise tax. An initial tax is imposed on an organization
fer from the requirements under IRC section 501(c)(3).
at the rate of 10 percent of the political expenditures.
Also, a tax at the rate of 2.5 percent of the expenditures
is imposed against the organization managers (jointly and
severally) who, without reasonable cause, agreed to the
expenditures knowing they were political expenditures.
The tax on management may not exceed $5,000 with
respect to any one expenditure.

11
Unrelated Business Income Tax (UBIT)
Net Income Subject to the UBIT Examples of Unrelated
Churches and religious organizations, like other tax- Trade or Business Activities
exempt organizations, may engage in income-producing Unrelated trade or business activities vary depending on
activities unrelated to their tax-exempt purposes, as long types of activities, as shown below.
as the unrelated activities are not a substantial part of the
organization’s activities. However, the net income from Advertising
such activities will be subject to the UBIT if the follow- Many tax-exempt organizations sell advertising in their
ing three conditions are met: publications or other forms of public communication.
■ the activity constitutes a trade or business, Generally, income from the sale of advertising is unrelat-
■ the trade or business is regularly carried on, and ed trade or business income. This may include the sale
of advertising space in weekly bulletins, magazines or
■ the trade or business is not substantially related to the
journals, or on church or religious organization Web sites.
organization’s exempt purpose. (The fact that the organi-
zation uses the income to further its charitable or reli- Gaming
gious purposes does not make the activity substantially
related to its exempt purposes.) Most forms of gaming, if regularly carried on, may be
considered the conduct of an unrelated trade or business.
Exceptions to UBIT This can include the sale of pull-tabs and raffles. Income
derived from bingo games may be eligible for a special
Even if an activity meets the above three criteria, the
tax exception (in addition to the exception regarding
income may not be subject to tax if it meets one of the
uncompensated volunteer labor covered above), if the
following exceptions: (a) substantially all of the work in
following conditions are met: (a) the bingo game is the
operating the trade or business is performed by volun-
traditional type of bingo (as opposed to instant bingo, a
teers; (b) the activity is conducted by the organization
variation of pull-tabs); (b) the conduct of the bingo game
primarily for the convenience of its members; or (c) the
is not an activity carried out by for-profit organizations
trade or business involves the selling of merchandise
in the local area; and (c) the operation of the bingo game
substantially all of which was donated.
does not violate any state or local law.
In general, rents from real property, royalties, capital
gains, and interest and dividends are not subject to the Sale of merchandise and publications
unrelated business income tax unless financed with The sale of merchandise and publications (including
borrowed money. the actual publication of materials) can be considered
the conduct of an unrelated trade or business if the

12
items involved do not have a substantial relationship church, such payments would not be subject to tax, as
to the exempt purposes of the organization. they would constitute rent from real property.
Whether an income-producing activity is an unrelated
Rental income
trade or business activity depends on all the facts and
Generally, income derived from the rental of real prop- circumstances. For more information, see IRS
erty and incidental personal property is excluded from Publication 598, Tax on Unrelated Business Income
unrelated business income. However, there are certain of Exempt Organizations.
situations in which rental income may be unrelated busi-
ness taxable income:
■ if a church rents out property on which there is debt Tax on Income-Producing Activities
outstanding (for example, a mortgage note), the rental If a church, or other exempt organization, has gross
income may constitute unrelated debt-financed income income of $1,000 or more for any taxable year from the
subject to UBIT. (However, if a church or convention or conduct of any unrelated trade or business, it is required
association of churches acquires debt-financed land for to file IRS Form 990-T, Exempt Organization Business
use in its exempt purposes within 15 years of the time of Income Tax Return, for that year. If the church is part of
acquisition, then income from the rental of the land may a larger entity (such as a diocese), it must file a separate
not constitute unrelated business income.), Form 990-T if it has a separate EIN. Form 990-T is due
■ if personal services are rendered in connection with the l5th day of the 5th month following the end of the
the rental, then the income may be unrelated business church’s tax year. (IRC section 512(b)(12) provides a
taxable income, or special rule for parishes and similar local units of a
■ if a church charges for the use of the parking lot, the church. A specific deduction is provided, which is equal
income may be unrelated business taxable income. to the lower of $1,000 or the gross income derived from
any unrelated trade or business regularly carried on
Parking lots by such parish or local unit of a church.) See Filing
Requirements on page 19.
If a church owns a parking lot that is used by church
members and visitors while attending church services,
any parking fee paid to the church would not be subject
to UBIT. However, if a church operates a parking lot that
is used by members of the general public, parking fees Download IRS
would be taxable, as this activity would not be substan-
publications and forms
tially related to the church’s exempt purpose, and park-
ing fees are not treated as rent from real property. If at www.irs.gov
the church enters into a lease with a third party who or
operates the church’s parking lot and pays rent to the
order free
through the IRS at
(800) 829-3676.

13
Employment Tax
Generally, churches and religious organizations are ■the church or religious organization pays the employee
required to withhold, report, and pay income and wages of less than $108.28 in a calendar year, or
Federal Insurance Contributions Act (FICA) taxes for ■ a church that is opposed to the payment of Social
their employees. Employment tax includes income tax Security and Medicare taxes for religious reasons files
withheld and paid for an employee and FICA taxes IRS Form 8274, Certification by Churches and Qualified
withheld and paid on behalf of an employee. Substantial Church Controlled Organizations Electing Exemption
penalties may be imposed against an organization that From Employer Social Security and Medicare Taxes.
fails to withhold and pay the proper employment tax. Very specific timing rules apply to filing Form 8274. It
Whether a church or religious organization must must be filed before the first date on which the electing
withhold and pay employment tax depends upon entity is required to file its first quarterly employment
whether the church’s workers are employees. tax return. This election does not relieve the organization
Determination of worker status is important. Several of its obligation to withhold income tax on wages paid to
facts determine whether a worker is an employee. For its employees. In addition, if such an election is made,
an in-depth explanation and examples of the common affected employees must pay Self-Employment Contri-
law employer-employee relationship, see IRS Publication butions Act (SECA) tax. For further information, see
15-A, Employer’s Supplemental Tax Guide. If a church Publication 517, Social Security and Other Information
or a worker wants the IRS to determine whether the for Members of the Clergy and Religious Workers.
worker is an employee, the church or worker should file
Withheld employee income tax and FICA taxes are
IRS Form SS-8, Determination of Employee Worker
reported on IRS Form 941, Employer’s Quarterly
Status for Purposes of Federal Employment Taxes and
Federal Tax Return. For more information about
Income Tax Withholding, with the IRS.
employment tax, see IRS Publication 15, Circular E,
Employer’s Tax Guide, and IRS Publication 15-A,
Employer’s Supplemental Tax Guide. See also, IRS
Social Security and Publication 517, Social Security and Other Information
Medicare Taxes — Federal Insurance for Members of the Clergy and Religious Workers.
Contributions Act (FICA)
FICA taxes consist of Social Security and Medicare
taxes. Wages paid to employees of churches or religious
Federal Unemployment
organizations are subject to FICA taxes unless one of the Tax Act (FUTA)
following exceptions applies: Churches and religious organizations are not liable for
■ wages are paid for services performed by a duly FUTA tax. For further information on FUTA, see IRS
ordained, commissioned, or licensed minister of a church Publication 517, Social Security and Other Information
in the exercise of his or her ministry, or by a member of for Members of the Clergy and Religious Workers.
a religious order in the exercise of duties required by
such order,

14
Special Rules for Compensation of Ministers
Withholding Income Tax agency will not be effective. The local congregation must
make the designation. A national church agency may
for Ministers make an effective designation for ministers it directly
Unlike other exempt organizations or businesses, a employs. If none of the minister’s salary has been offi-
church is not required to withhold income tax from the cially designated as a housing allowance, the full salary
compensation that it pays to its duly ordained, commis- must be included in gross income.
sioned, or licensed ministers for performing services in The fair rental value of a parsonage or housing allowance
the exercise of their ministry. An employee minister may, is excludable from income only for income tax purposes.
however, enter into a voluntary withholding agreement These amounts are not excluded in determining the min-
with the church by completing IRS Form W-4, Employee’s ister’s net earnings from self-employment for Self-
Withholding Allowance Certificate. A church should Employment Contributions Act (SECA) tax purposes.
report compensation paid to a minister on Form W-2, Retired ministers who receive either a parsonage or
Wage and Tax Statement, if the minister is an employee, housing allowance are not required to include such
or on IRS Form 1099-MISC, Miscellaneous Income, if amounts for SECA tax purposes.
the minister is an independent contractor.
As mentioned above, a minister who receives a parson-
age or rental allowance excludes that amount from his
income. The portion of expenses allocable to the exclud-
Parsonage or Housing Allowances able amount is not deductible. This limitation, however,
Generally, a minister’s gross income does not include the does not apply to interest on a home mortgage or real
fair rental value of a home (parsonage) provided, or a estate taxes, nor to the calculation of net earnings from
housing allowance paid, as part of the minister’s compen- self-employment for SECA tax purposes.
sation for services performed that are ordinarily the IRS Publication 517, Social Security and Other
duties of a minister. Information for Members of the Clergy and Religious
A minister who is furnished a parsonage may exclude Workers, has a detailed example of the tax treatment for
from income the fair rental value of the parsonage, a housing allowance and the related limitations on
including utilities. However, the amount excluded cannot deductions. IRS Publication 525, Taxable and
be more than the reasonable pay for the minister’s services. Nontaxable Income, has information on particular types
A minister who receives a housing allowance may of income for ministers.
exclude the allowance from gross income to the extent it
is used to pay expenses in providing a home. Generally,
those expenses include rent, mortgage payments, utili- Social Security and Medicare Taxes —
ties, repairs, and other expenses directly relating to pro- Federal Insurance Contributions Act
viding a home. If a minister owns a home, the amount
(FICA) vs. Self-Employment
excluded from the minister’s gross income as a housing
allowance is limited to the least of the following: (a) the Contributions Act (SECA)
amount actually used to provide a home; (b) the amount The compensation that a church or religious organization
officially designated as a housing allowance; or (c) the pays to its ministers for performing services in the exer-
fair rental value of the home. The minister’s church or cise of ministry is not subject to FICA taxes. However,
other qualified organization must designate the housing income that a minister earns in performing services in
allowance pursuant to official action taken in advance of the exercise of his ministry is subject to SECA tax, unless
the payment. If a minister is employed and paid by a the minister has timely applied for and received an
local congregation, a designation by a national church exemption from SECA tax.

15
Payment of Employee Business Expenses
A church or religious organization is treated like any treated as wages reportable on Form W-2, but are not
other employer as far as the tax rules regarding employ- subject to FICA taxes or income tax withholding.)
ee business expenses. The rules differ depending upon For example, if a church or religious organization pays
whether the expenses are paid through an accountable its secretary a $200 per month allowance to reimburse
or non-accountable plan, and these plans determine monthly business expenses the secretary incurs while
whether the payment for these expenses is included in conducting church or religious organization business, and
the employee’s income. the secretary is not required to substantiate the expenses
or return any excess, then the entire $200 must be re-
ported on Form W-2 as wages subject to FICA taxes and
Accountable Reimbursement Plan income tax withholding. In the same situation involving
An arrangement that an employer establishes to an employee-minister, the allowance must be reported
reimburse or advance employee business expenses will on the minister’s Form W-2, but no FICA or income tax
be an accountable plan if it meets three requirements: withholding is required. For further information see
(1) involves a business connection; (2) requires the IRS Publication 463, Travel, Entertainment, Gift and
employee to substantiate expenses incurred; and (3) Car Expenses.
requires the employee to return any excess amounts. One common business expense reimbursement is for
Employees must provide the organization with sufficient automobile mileage. If a church or religious organization
information to identify the specific business nature of pays a mileage allowance at a rate that is less than or
each expense and to substantiate each element of an equal to the federal standard rate, the amount of the
expenditure. It is not sufficient for an employee to aggre- expense is deemed substantiated. (Each year, the federal
gate expenses into broad categories such as travel or to government establishes a standard mileage reimbursement
report expenses through the use of non-descriptive terms rate.) There are no income or employment tax conse-
such as miscellaneous business expenses. Both the sub- quences to the reimbursed individual provided that the
stantiation and the return of excess amounts must occur employee substantiates the time, place, and business
within a reasonable period of time. purposes of the automobile mileage for which reimburse-
ment is sought. Of course, reimbursement for automo-
Employee business expenses reimbursed under an
bile mileage incurred for personal purposes is includible
accountable plan are: (a) excluded from an employee’s
in the individual’s income.
gross income; (b) not required to be reported on the
employee’s IRS Form W-2, Wage and Tax Statement; If a church or religious organization reimburses automo-
and (c) exempt from the withholding and payment of bile mileage at a rate exceeding the standard mileage
wages subject to FICA taxes and income tax withholdings. rate, the excess is treated as paid under a non-accountable
plan. This means that the excess is includible in the indi-
vidual’s income and is subject to the withholding and
payment of income and employment taxes, if applicable.
Non-accountable Reimbursement Plan
In addition, any mileage reimbursement that is paid with-
If the church or religious organization reimburses or
out requiring the individual to substantiate the time, place,
advances the employee for business expenses, but the
and business purposes of each trip is included in the indi-
arrangement does not satisfy the three requirements of
vidual’s income, regardless of the rate of reimbursement.
an accountable plan, the amounts paid to the employees
are considered wages subject to FICA taxes and income No income is attributed to an employee or a volunteer
tax withholding, if applicable, and are reportable on who uses an automobile owned by the church or religious
Form W-2. (Amounts paid to employee ministers are organization to perform church-related work.

16
Recordkeeping Requirements
Books of Accounting Length of Time to Retain Records
and Other Types of Records The law does not specify a length of time that records
All tax-exempt organizations, including churches and must be retained; however, the following guidelines
religious organizations (regardless of whether tax-exempt should be applied in the event that the records may be
status has been officially recognized by the IRS), are material to the administration of any federal tax law.
required to maintain books of accounting and other
records necessary to justify their claim for exemption in Type of Record Length of Time to Retain
the event of an audit. See Special Rules Limiting IRS
Authority to Audit a Church on page 22. Tax-exempt Records of revenue Retain for at least four
organizations are also required to maintain books and and expenses, years after filing the
records that are necessary to accurately file any federal including payroll return(s) to which they
tax and information returns that may be required. records. relate.
There is no specific format for keeping records. How-
Records relating to Retain for at least four
ever, the types of required records frequently include
acquisition and years after the filing of
organizing documents (charter, constitution, articles
disposition of property the return for the year
of incorporation) and bylaws, minute books, property
(real and personal, in which disposition
records, general ledgers, receipts and disbursements
including investments). occurs.
journals, payroll records, banking records, and invoices.
The extent of the records necessary generally varies
according to the type, size, and complexity of the
organization’s activities.

17
Filing Requirements
Information and Tax Returns — Forms to File and Due Dates
Churches or religious organizations may be required to report certain payments to the IRS. The following is a list of the
most frequently required returns, who should use them, how they are used, and when they should be filed.

Returns Who Should Use Them How They are Used When to File

Form W-2 Organizations with employees. Furnish each employee with

Wage and Tax Statement a completed Form W-2
by January 31; and file all
Form W-3
Forms W-2 and Form W-3
Transmittal of Wage
with the Social Security
and Tax Statement
Administration (SSA) by the
last day of February.

Form W-2G Any charitable or religious organiza- The requirements for reporting and For each winner meeting the
Certain Gaming Winnings tion, including a church, that spon- withholding depend on the type of filing requirement, the church
sors a gaming event (raffles, bingo) gaming, the amount of winnings, and or religious organization must
For more information on reporting
requirements for gaming activities, must file Form W-2G when the ratio of winnings to the wager. furnish each winner Form W-2G
see IRS Publication 3079, Gaming a participant wins a prize over by January 31; and file Copy A
Publication for Tax-Exempt
Organizations. a specific value amount. of Form W-2G with the IRS by
February 28.

Form 941 Use Form 941 to report Social Security The returns are due on April 30,
Employer’s Quarterly and Medicare taxes and income taxes July 31, October 31, and
Federal Tax Return withheld by the organization, and Social January 31 (10 days later if the
Security and Medicare taxes paid by the organization deposited all taxes
organization. when due).

Form 945 If a church or religious organization File Form 945 by January 31.
Annual Return of withholds income tax, including backup This form is not required for
Withheld Federal withholding, from non-payroll payments, those years in which there is
Income Tax it must file Form 945. no non-payroll tax liability.

Form 990 Generally, all religious organizations Form 990-EZ is a simplified version of Generally, Form 990 or Form
Return of Organization (See Exceptions to file 990 below.) Form 990 that can be used by organiza- 990-EZ must be filed on or
Exempt from Income Tax must file Form 990 or Form 990-EZ tions that have annual gross receipts of before the 15th day of the 5th
unless their annual gross receipts do less than $100,000 and have total assets of month following the end of the
Form 990-EZ
not normally exceed $25,000.* less than $250,000 at the end of the year. organization’s annual accounting
Short Form Return of
Organization Exempt period (May 15 for a calendar
From Income Tax Exceptions to file 990 year accounting period).

The following is a list of some of the organizations that are not required to file Form 990. The organization must include
*For tax year beginning after
■ churches (as opposed to “religious organizations,” defined earlier) Schedule A (Form 990 or Form
December 31, 2006, certain
■ inter-church organizations of local units of a church 990-EZ) when it files. Schedule B
organizations must file an annual ■ mission societies sponsored by or affiliated with one or more churches or church denomina-
(Form 990 or Form 990-EZ) may
eletronic notice with the IRS. tions, if more than half of the activities are conducted in, or directed at, persons in foreign countries
■ an exclusively religious activity of any religious order
also be required.
For more information, visit
www.irs.gov/eo. For a list of other organizations that are not required to file Form 990,
see the Instructions for Form 990 and Form 990-EZ.

18
Returns Who Should Use Them How They are Used When to File

Form 990-T Churches and religious Churches and religious organizations Form 990-T must be filed by the
Exempt Organization organizations. must file Form 990-T if they generate 15th day of the 5th month after
Business Income Tax Return gross income from an unrelated business the organization’s accounting
For more information on unrelated of $1,000 or more for a taxable year. period ends (May 15 for a
business income, see Unrelated Business calendar year accounting period).
Income Tax (UBIT) on page 12.

Form 990-W Churches and religious If the tax on unrelated business income
Estimated Tax on Unrelated organizations. is expected to be $500 or more, the
Business Taxable Income for church or religious organization must
Tax-Exempt Organizations make estimated tax payments.

Use Form 990-W to compute the

estimated tax liability.

Form 1096 Churches and religious Use Form 1096 to transmit Forms Form 1096 must be filed by
Annual Summary and organizations. 1099-MISC, W-2G, and certain other February 28 in the year follow-
Transmittal of U.S. forms to the IRS. ing the calendar year in which
Information Returns the payments were made.

Form 1099 Churches and religious A church or religious organization must Churches or religious organiza-
Miscellaneous Income organizations. use Form 1099-MISC if it pays an unin- tions must furnish each payee
corporated individual or an entity $600 or with a copy of Form 1099-MISC
See the Instructions for
Form 1099-MISC for details. more in any calendar year for one of the by January 31; and file Copy A
following payments: gross rents; commis- of Form 1099-MISC with the
sions, fees, or other compensation paid IRS by February 28.
to non-employees; prizes and awards; or
other fixed and determinable income.

Form 5578 A church or religious organization A church or religious organization Form 5578 must be filed on or
Annual Certification of that operates a private school, whether must file Form 5578 to certify that before the 15th day of the 5th
Racial Nondiscrimination separately incorporated or operated as it does not discriminate based on race month following the end of the
for a Private School Exempt part of its overall operations, that or ethnic origin. organization’s taxable year
from Federal Income Tax teaches secular subjects and generally (May 15 for a calendar year).
For information on racial and ethnic complies with state law requirements
If an organization files Form
nondiscriminatory policies, see for public education.
Revenue Procedure 75-50, 1975-2 990 or Form 990-EZ, the
C.B. 587 at www.irs.gov. certification must be made
Note: It is not considered racially discriminatory for a parochial school to select students on the
basis of membership in a religious denomination if membership in the denomination is open to
on Schedule A (Form 990 or
all on a racially nondiscriminatory basis. Further, a seminary, or other purely religious school, that Form 990-EZ).
primarily teaches religious subjects usually with the purpose of training students for the ministry,
is not subject to the racially nondiscriminatory requirements because it is considered to be a reli-
gious rather than an educational organization.

Form 8282 Churches and religious A church or religious organization must The church or religious organi-
Donee Information Return organizations. file Form 8282 if it sells, exchanges, zation must file Form 8282 with
transfers, or otherwise disposes of certain the IRS within 125 days of date
non-cash donated property within three of disposition of the property;
years of the date it originally received and furnish the original donor
the donation. This applies to non-cash with a copy of the form.
property that had an appraised value of
more than $5,000 at time of donation.

19
Charitable Contributions —
Recordkeeping, Substantiation and Disclosure Rules
A church or religious organization should be aware of ■ statement that goods or services that a church or reli-
the recordkeeping and substantiation rules imposed on gious organization provided in return for the contribu-
donors of charitable contributions and the disclosure tion consisted entirely of intangible religious benefits, or
rules imposed on charities that receive certain quid pro ■ description and good faith estimate of the value of
quo contributions. goods or services other than intangible religious benefits
that the church or religious organization provided in
Recordkeeping Rules return for the contribution.
A donor cannot claim a tax deduction for any contribu- The church or religious organization may either provide
tion of cash, a check or other monetary gift made on separate acknowledgments for each single contribution
or after January 1, 2007, unless the donor maintains a of $250 or more or one acknowledgment to substantiate
record of the contribution in the form of either a bank several single contributions of $250 or more. Separate
record (such as a cancelled check) or a written commu- contributions are not aggregated for purposes of measur-
nication from the charity (such as a receipt or a letter) ing the $250 threshold.
showing the name of the charity, the date of the contri-
bution, and the amount of the contribution.
Disclosure Rules that Apply
to Quid Pro Quo Contributions
Substantiation Rules
A contribution made by a donor in exchange for goods
A donor cannot claim a tax deduction for any single or services is known as a quid pro quo contribution. A
contribution of $250 or more unless the donor obtains donor may only take a contribution deduction to the
a contemporaneous, written acknowledgment of the extent that his or her contribution exceeds the fair mar-
contribution from the recipient church or religious ket value of the goods and services the donor receives in
organization. A church or religious organization that return for the contribution. Therefore, donors need to
does not acknowledge a contribution incurs no penalty; know the value of the goods or services. A church or reli-
but without a written acknowledgment, the donor gious organization must provide a written statement to a
cannot claim a tax deduction. Although it is a donor’s donor who makes a payment exceeding $75 partly as a
responsibility to obtain a written acknowledgment, a contribution and partly for goods and services provided
church or religious organization can assist the donor by by the organization.
providing a timely, written statement containing
the following information: Example 1: If a donor gives a church a payment of $100 and, in
return, receives a ticket to an event valued at $40, this is a quid
■ name of the church or religious organization,
pro quo contribution, and only $60 is deductible by the donor
■ date of the contribution, ($100 - $40 = $60). Even though the deductible amount does not
■ amount of any cash contribution, and exceed $75, since the quid pro quo contribution the church
■ description (but not the value) of non-cash contributions. received is in excess of $75, the church must provide the donor
with a written disclosure statement. The statement must: (1) inform
In addition, the timely, written statement must contain
the donor that the amount of the contribution that is deductible for
one of the following:
federal income tax purposes is limited to the excess of money (and
■ statement that no goods or services were provided by the fair market value of any property other than money) con-
the church or religious organization in return for the tributed by the donor over the value of goods or services provided
contribution, by the church or religious organization; and (2) provide the donor
with a good-faith estimate of the value of the goods or services.

20
The church or religious organization must provide the
written disclosure statement with either the solicitation
IRS Publication 1771,
or the receipt of the contribution and in a manner that
is likely to come to the attention of the donor. For Charitable Contributions:
example, a disclosure in small print within a larger Substantiation and
document may not meet this requirement.
Disclosure Requirements,
provides more information
Exceptions to Disclosure Statement on substantiation and
A church or religious organization is not required to disclosure rules.
provide a disclosure statement for quid pro quo
contributions when: (a) the goods or services meet the Order Publication 1771
standards for insubstantial value; or (b) the only benefit
free through the IRS at
received by the donor is an intangible religious benefit.
Additionally, if the goods or services the church or (800) 829-3676.
religious organization provides are intangible religious
benefits (examples follow), the acknowledgement for
contributions of $250 or more does not need to describe
those benefits.
Generally, intangible religious benefits are benefits
provided by a church or religious organization that are
not usually sold in commercial transactions outside a
donative (gift) context.
Intangible religious benefits include:
■ admission to a religious ceremony
■ de minimus tangible benefits, such as wine used in
religious ceremony

Benefits that are not

intangible religious benefits include:
■ tuition for education leading to a recognized degree
■ travel services
■ consumer goods

21
Special Rules Limiting
IRS Authority to Audit a Church
Tax Inquiries and Audit Process
Examinations of Churches The following is the sequence of the audit process.
Congress has imposed special limitations, found in IRC 1. If the reasonable belief requirement is met, the IRS
section 7611, on how and when the IRS may conduct must begin an inquiry by providing a church with written
civil tax inquiries and examinations of churches. The IRS notice containing an explanation of its concerns.
may only initiate a church tax inquiry if the Director, 2. The church is allowed a reasonable period in which to
Exempt Organizations, Examinations reasonably respond by furnishing a written explanation to alleviate
believes, based on a written statement of the facts and IRS concerns.
circumstances, that the organization: (a) may not qualify
for the exemption; or (b) may not be paying tax on an 3. If the church fails to respond within the required
unrelated business or other taxable activity. time, or if its response is not sufficient to alleviate IRS
concerns, the IRS may, generally within 90 days, issue
Restrictions on Church Inquiries and Examinations a second notice, informing the church of the need to
examine its books and records.
Restrictions on church inquiries and examinations apply
only to churches (including organizations claiming to be 4. After issuance of a second notice, but before com-
churches if such status has not been recognized by IRS) mencement of an examination of its books and records,
and conventions or associations of churches. They do the church may request a conference with an IRS official
not apply to related persons or organizations. Thus, for to discuss IRS concerns. The second notice will contain
example, the rules do not apply to schools that, although a copy of all documents collected or prepared by the
operated by a church, are organized as separate legal IRS for use in the examination and subject to disclosure
entities. Similarly, the rules do not apply to integrated under the Freedom of Information Act, as supplemented
auxiliaries of a church. by IRC section 6103 relating to disclosure and confiden-
tiality of tax return information.
Restrictions on church inquiries and examinations do not
apply to all church inquiries by the IRS. The most com- 5. Generally, examination of a church’s books and
mon exception relates to routine requests for informa- records must be completed within two years from the
tion. For example, IRS requests for information from date of the second notice from the IRS.
churches about filing of returns, compliance with income If at any time during the inquiry process the church
or Social Security and Medicare tax withholding require- supplies information sufficient to alleviate the concerns
ments, supplemental information needed to process of the IRS, the matter will be closed without examination
returns or applications, and other similar inquiries are of the church’s books and records. There are additional
not covered by the special church audit rules. safeguards for the protection of churches under IRC
Restrictions on church inquiries and examinations do not section 7611. For example, the IRS cannot begin a sub-
apply to criminal investigations or to investigations of the sequent examination of a church for a five-year period
tax liability of any person connected with the church, unless the previous examination resulted in a revocation,
e.g., a contributor or minister. notice of deficiency of assessment, or a request for a
significant change in church operations, including a
The procedures of IRC section 7611 will be used in
significant change in accounting practices.
initiating and conducting any inquiry or examination into
whether an excess benefit transaction (as that term is
used in IRC section 4958) has occurred between a
church and an insider.

22
Glossary
Church. Certain characteristics are generally attributed to churches. Men’s and women’s organizations, seminaries, mission societies,
These attributes of a church have been developed by the IRS and and youth groups that satisfy the first two requirements above are
by court decisions. They include: distinct legal existence; recog- considered integrated auxiliaries whether or not they meet the
nized creed and form of worship; definite and distinct ecclesiastical internal support requirements. More guidance as to the types of
government; formal code of doctrine and discipline; distinct reli- organizations the IRS will treat as integrated auxiliaries can be
gious history; membership not associated with any other church or found in the Code of Regulations, 26 CFR section 1.6033-2(h).
denomination; organization of ordained ministers; ordained minis-
The same rules that apply to a church apply to the integrated
ters selected after completing prescribed courses of study; litera-
auxiliary of a church, with the exception of those rules that apply
ture of its own; established places of worship; regular congrega-
to the audit of a church. See section Special Rules Limiting IRS
tions; regular religious services; Sunday schools for the religious
Authority To Audit A Church on page 22.
instruction of the young; schools for the preparation of its ministers.
The IRS generally uses a combination of these characteristics,
Minister. The term minister is not used by all faiths; however,
together with other facts and circumstances, to determine whether
in an attempt to make this publication easy to read, we use it
an organization is considered a church for federal tax purposes.
because it is generally understood. As used in this booklet, the
The IRS makes no attempt to evaluate the content of whatever term minister denotes members of clergy of all religions and
doctrine a particular organization claims is religious, provided the denominations and includes priests, rabbis, imams, and similar
particular beliefs of the organization are truly and sincerely held by members of the clergy.
those professing them and the practices and rites associated with
the organization’s belief or creed are not illegal or contrary to IRC Section 501(C)(3). IRC section 501(c)(3) describes charita-
clearly defined public policy. ble organizations, including churches and religious organizations,
which qualify for exemption from federal income tax and generally
Integrated Auxiliary Of A Church. The term integrated are eligible to receive tax-deductible contributions. This section
auxiliary of a church refers to a class of organizations that are related provides that:
to a church or convention or association of churches, but are not ■ an organization must be organized and operated exclusively
such organizations themselves. In general, the IRS will treat an for religious or other charitable purposes,
organization that meets the following three requirements as an
■ net earnings may not inure to the benefit of any private
integrated auxiliary of a church. The organization must:
individual or shareholder,
■ be described both as an IRC section 501(c)(3) charitable
■ no substantial part of its activity may be attempting to
organization and as a public charity under IRC sections 509(a)(1),
influence legislation,
(2), or (3),
■ the organization may not intervene in political campaigns, and
■ be affiliated with a church or convention or association of
churches, and ■ the organization’s purposes and activities may not be illegal or
violate fundamental public policy.
■ receive financial support primarily from internal church sources
as opposed to public or governmental sources. These requirements are set forth in greater detail throughout this
publication.

23
Help From The IRS
IRS Tax Publication 1 Your Rights as a Taxpayer

Publications
Publication 15 Circular E, Employer’s Tax Guide
to Order
The IRS provides free tax Publication 15-A Employer’s Supplemental Tax Guide
publications and forms. Order
publications and forms by Publication 334 Tax Guide for Small Business
calling toll-free (800) 829-3676, (For Individuals Who Use Schedule C or C-EZ)
or download publications and
forms from the IRS Web site Publication 463 Travel, Entertainment, Gift, and Car Expenses
at www.irs.gov. The following
list of publications may pro- Publication 517 Social Security and Other Information
vide further information for for Members of the Clergy and Religious Workers
churches and other religious
organizations: Publication 525 Taxable and Nontaxable Income

Publication 526 Charitable Contributions

Publication 557 Tax-Exempt Status for Your Organization

Publication 561 Determining the Value of Donated Property

Publication 571 Tax-Sheltered Annuity Programs for Employees

of Public Schools and Certain Tax-Exempt Organizations

Publication 598 Tax on Unrelated Business Income

of Exempt Organizations

Publication 910 Guide to Free Tax Services

Publication 1771 Charitable Contributions: Substantiation and Disclosure

Publication 3079 Gaming Publication for Tax-Exempt Organizations

24
IRS Customer Service
Telephone assistance for general tax
information is available by calling:
IRS Customer Service
toll-free at (800) 829-1040.

EO Customer Service
Telephone assistance specific to exempt
organizations is available by calling:
IRS Exempt Organizations Customer
Account Services toll-free at
(877) 829-5500.

EO Web Site
Visit the IRS Exempt Organizations
Web site at www.irs.gov/eo.

EO Update
To receive IRS Exempt Organization’s
EO Update, a periodic newsletter with
information for tax-exempt organizations
and tax practitioners who represent
them, visit www.irs.gov/eo and click on
“EO Newsletter.”
Department of the Treasury
Internal Revenue Service
w w w . i r s . g o v
Publication 1828 (Rev. 09-2006)
Catalog Number 2 1 0 9 6 G