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The Consequences of Losing Tax-Exempt Status

When a church or religious organization loses its tax-exempt status, the obvious consequences are that donations to the organizations can no longer be deducted by donors. In addition, loss of tax-exempt status means that the organization is subject to federal and state income taxes on its net income. That last statement is not quite as bad as it sounds, though because the tax is on net income, not the gross. Most such organizations tend to spend most, if not all, of their income on programs and infrastructure. Therefore, there would be little or no net income and no income tax to pay.

There are numerous other consequences involved with losing one’s tax-exempt status that can affect the organization significantly.

These negative consequences can be classified into four categories. The first of these relates to tax issues beyond income taxes. If a church loses its tax-exempt status, it could lose its property tax exemption, sales tax exemption, and unemployment tax (or reemployment tax if you’re in Florida) exemption.

The second category relates to the church and its privileged status in terms of a number of laws that churches and religious organizations are currently exempted from. Their status under local zoning laws could be affected. Such organizations are also often given special dispensation in regards to zoning whereas a for-profit business would not be allowed to operate in that location. In addition, there are preferential mailing rates which could be affected. Churches and religious organizations are currently exempt from the ban on religious discrimination laws and is exempt from public accommodation provisions of the Americans with Disabilities Act. Both of these could be affected.  Nondiscrimination rules regarding various fringe benefits would apply to churches and religious organizations losing their exempt status.

The third category relates to other laws that carve out a privilege for churches and religious organizations. They would no longer be eligible to establish or maintain a 403(b) tax-sheltered annuity. They would also lose their exemption from registration of securities under state laws. Some churches and religious organizations do have bond issues, so these would now have to be registered. The Church Audit Procedures Act contains a number of protections for churches and these would no longer apply. Exemptions under state charitable solicitation laws would also be affected.

Finally, loss of tax-exempt status by the church or religious organization could have a negative impact on its ministers as they would likely not be eligible for a housing allowance nor could the minister opt out of social security and Medicare as they would presumably no longer be receiving earnings in a ministerial capacity.

These negative factors would turn the operations of these organizations upside down, as these are far-reaching and could prove to be quite expensive.  Churches and other tax-exempt organizations should be vigilant about maintaining their tax-exempt status.



Dr. John Stancil (My Bald CPA) is Professor Emeritus of Accounting and Tax at Florida Southern College in Lakeland, FL. He is a CPA, CMA, and CFM and passed all exams on the first attempt. He holds a DBA from the University of Memphis and the MBA from the University of Georgia. He has maintained a CPA practice since 1979 with an emphasis in taxation. His areas of expertise include church and clergy tax issues and the foreign earned income credit. He prepares all types of returns, individual and business.

Dr. Stancil has written for the Polk County Business Journal and has presented a number of papers at academic conferences. He wrote the Instructor’s Manual for the 13th edition of Horngren’s Cost Accounting. He is published in the Global Sustainability as a Business Imperative, Green Issues and Debates, The Encyclopedia of Business in Today’s World, The Palmetto Business Review, The CPA Journal, and in the NATP TaxPro Journal. His paper, “Building Sustainability into the Tax Code” was recognized as the outstanding accounting paper at the annual meeting of the South East InfORMS. He wrote a book entitled “Tax Issues Faced by U. S. Missionary Personnel Abroad ” that will soon be published.

He has recently launched a new endeavor, Church Tax Solutions, which presents online, on demand seminars on various church and clergy tax issues.

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