Archive for Religion

Proving Tax Exempt Status

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In order for contributions to a charitable organization to be deductible, the organization must be an IRS tax-exempt non-profit organization. Before making a contribution to a charitable organization, potential donors may inquire about the organization’s tax exempt status. In these cases, the organization should be able to demonstrate to the potential donor that it is, in fact, a tax-exempt organization. Many people confuse being a non-profit organization and having IRS tax-exempt status. An organization is established as a non-profit by filing with the state as a non-profit corporation. One becomes a tax-exempt organization by filing Form 1023 (or 1023EZ) with the IRS. However, churches are automatically exempt and do not need to apply for tax-exempt status.

Having tax-exempt status means that the organization is not subject to income tax on Read more

Don’t Lose Your Soul With A Corporation Sole


A corporation sole is a legitimate legal entity tracing its roots back many centuries in Europe. Its origin is ecclesiastical, or church-related. Even today, most corporations sole are church-related. For example, the Office of the Archbishop of Canterbury in Great Britain is organized as a corporation sole. The Archbishop, not the individual holding the office, is the officer of the corporation. The Roman Catholic Church makes extensive use of the corporation sole.

The property of the church or religious organization is titled to the office, not the individual and avoids the religious property being treated as part of the estate of the vicar of the church. This insures the continuation of ownership of the property dedicated to the benefit of a religious organization. Generally, the creditors of a Corporation Sole may not look to the Read more

The Church Audit Procedures Act – Part Two

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In Part one of this series, we examined the basics of the Church Audit Procedures Act.  In this Part, we are taking a look at what measures a church can take to be prepared in the event of an IRS examination.  These steps are not just to ward off the IRS, but are just good, basic business practices.

First, understand that there is not a high risk of your church being the subject of an IRS examination.  Although the IRS does not disclose such data, it is estimated that fewer than 100 churches per year are examined.  Those subject to such audits are those examining the most conspicuously bad behavior.  There is a higher chance that the Department of Labor would examine a church for violation of the Fair Labor Standards Act, but that is a topic for another time.

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The Church Audit Procedures Act – The Basics

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There is a concern among many that the IRS will come sweeping down on their church, ruthlessly coming in and examining every nuance of the church, upsetting its operations, and causing general disruption and loss of reputation for the church. There are established procedures for the IRS in initiating an examination, so the above is not likely to happen. This is the first of two articles on the Church Audit Procedures Act. Here we are going to examing the basics of the law and the protections it affords to churches. In Part 2, we will examine what the church needs to be doing in the event the IRS come knocking.


The Church Audit Procedures Act was passed by Congress in 1984. Its intent was to protect churches from its constitutional separation of church and state, while allowing the IRS to Read more

Unrelated Business Taxable Income

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Non-profit organizations in the United States do not pay income tax on their “income.” However, when a non-profit ventures into certain business activities, it will owe income tax on this income, termed “unrelated business taxable income (UBTI).” This is only fair, as the non-profit is now competing with profit-making organizations that must pay tax on its income. UBTI levels the playing field.

What is Unrelated Business Taxable Income?

The IRS defines unrelated business taxable income as “gross income derived from any unrelated trade or business regularly conducted by the exempt organization, less the deductions directly connected with carrying on the trade or business.” Let’s unpack this definition and see how it applies in particular cases. Read more

Church Exemption From Filing Form 990 Challenged

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Churches are exempt from having to file Form 990 with the IRS. This exemption has been in place since the early 1940’s when Form 990 was adopted, and non-profit organizations were required to file the form with the IRS. This was brought about by a concern that tax-exempt organizations were using their status to engage in unfair competition with for-profit businesses. Churches have held to be exempt, as to do so would violate the First Amendment to the Constitution.

The Freedom From Religion Foundation (FFRF) has filed suit in a federal district court in Wisconsin, alleging that it was required to file a “detailed application” (Form 1023) and pay a fee before obtaining tax exempt status, and has also been required to file “detailed, intrusive and expensive annual reports” (Form 990) in order to maintain that status. Read more

Why The Ministerial Housing Allowance Might Not Survive

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On September 7, as was discussed in “Appeals Court Upholds Clergy Housing Exemption,” the Seventh Circuit of appeals reversed a Federal District Court decision that ruled the minister’s housing allowance was unconstitutional. The suit had been brought by the Freedom From Religion Foundation. So the housing allowance survives, for now.

The Appeals Court ruling was actually based on the fact that the plaintiffs, Dan Barker and Laurie Anne Gaylor (co-presidents of FFRF) did not have standing to sue as they had not been denied the benefit of a housing allowance. In ruling that the plaintiffs did not have standing, the court did not actually address the issue of the constitutionality of the housing allowance. Read more

Appeals Court Upholds Clergy Housing Exemption

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The 7th U S Circuit Court of Appeals has dismissed a lawsuit by the Freedom From Religion Foundation (FFRF) that challenged the constitutionality of the clergy housing allowance. The suit was originally brought in the District Court for the Western District of Wisconsin where Judge Barbara Crabb ruled that the tax break for ministers was unconstitutional. Her basis for the ruling was that the law benefited religious people and no one else. The decision, which would potentially eliminate the most important tax break for ministers, was stayed pending appeal.

The law allows ministers of the gospel to exclude income tax on amounts designated by the church as housing allowance. Self-employment taxes are payable on these amounts. In addition, ministers may “double dip,” as they are allowed to deduct mortgage interest Read more

Starting And Maintaining A Non-Profit Organization

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Each year, more than 50,000 organizations apply to the IRS for tax exempt status. There are several steps involved in becoming tax exempt. Many do not realize that there is a difference in a non-profit organization and one that is tax exempt. Not all non-profit organizations hold tax-exempt status. According to IRS statistics, there were slightly over 189,000 returns filed in 2011 by tax-exempt organizations. However, the National Center for Charitable Statistics lists a total of 1,427,807 non-profit organizations. Obviously, many non-profits are not tax exempt, or at least, are failing to file a return.

Forming a Non-Profit Organization

The first step in forming a non-profit organization is to form a non-profit corporation. This involves filing an application with an appropriate official in the state in which the Read more

What Is A Church?

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Churches occupy a distinct place in the tax code of the United States. They are tax exempt, but that is not where the uniqueness lies. Many types of charitable organizations are considered tax-exempt non-profit organizations. Most organizations wishing to obtain tax exempt status must first file Form 1023 (or the new Form 1023EZ) with the IRS, seeking approval as an IRS-qualified tax exempt organization. The unique aspect of a church is that qualifying as tax exempt is automatic if it meets the IRS definition of a 501(c)(3) organization:

1. The organization must be organized and operated exclusively for religious, charitable, scientific, or other charitable purpose.
2. Net earnings may not inure to the benefit of any private individual or shareholder. Read more

Minister’s Housing Allowance Subject of Court Battles

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The housing allowance is a significant tax benefit for a minister. It can result in thousands of dollars in tax savings annually. The law currently allows a minister to occupy a church-owned parsonage without paying income tax on the value of the accommodations. Alternatively, the church may designate an amount to be paid to the minister as housing allowance. This amount, when used for housing costs, is not subject to income tax. Both a parsonage and a housing allowance are subject to self-employment taxes.

Only One Home Subject to Housing Allowance

Several court cases have recently been brought, seeking to limit or abolish this tax benefit for ministers.

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The Minister’s Housing Allowance

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The housing exclusion has been characterized as the most important tax benefit available to ministers. There are two commonly encountered situations in regard to housing for a minister. In the first case, the minister lives in church-provided housing. While this was quite common in the past the number of churches providing a parsonage for the pastor has declined significantly in recent years.

Under these arrangements, a minister lives in the parsonage without charge. In some cases, the church will also provide a housing or utility allowance to cover expenses incurred by the minister in maintaining the home. The value of the provided housing and allowance are not subject to income tax, but the fair rental value plus any allowance amount are subject to self-employment taxes. Read more