Religious Nonprofit Organizations and Churches

Religious nonprofit organizations are created at the state level like any other nonprofit; the difference being that they are formed for religious purposes. Generally, religious nonprofits are exempt from certain taxes—such as the income tax—and most religious organizations can file for and obtain 501c3 tax exempt status from the IRS, as by default, most churches are classified as public charities. 

Is there a difference between a church and a religious organization?

A church is a place of worship, such as a synagogue, mosque, or temple. Churches are automatically considered 501c3 charities, as long as they meet the criteria required by the IRS, and continually adhere to 501c3 requirements.

A religious organization is not automatically a place of worship like a church is. A religious organization is generally a nondenominational or interdenominational organization and has a principal purpose of advancing religion.

So according to the IRS, what defines a religious organization? A religious organization is one formed and operated exclusively for “religious” purposes, and it must actively promote the advancement of its religion via various activities.
 

What are the tax-exempt criteria for a religious organization?

In order to be considered tax-exempt, a religious organization must meet certain federal requirements. The organization cannot attempt to influence legislation, and it must not be involved with or intervene in political activity or campaigns, and the organization must be exclusively started and run for religious, educational, scientific, or other charitable purposes in order to be considered 501c3 tax-exempt. These are the requirements that a religious organization or church must adhere to in order to be considered tax-exempt:

  • The organization must be organized and operated exclusively for religious or other charitable purposes
  • The net earning must not benefit any private individual or shareholder exclusively
  • No substantial part of the organization’s activity may be the attempt to influence legislation
  • The organization cannot intervene in political campaigns
  • The organization’s purpose and actions cannot be illegal or violate fundamental public policy

 

Unrelated Business Income Tax

Religious organizations can legally engage in activities that generate an income that is unrelated to their tax-exempt requirements as long as the unrelated business activities are not a substantial part of the religious organization’s activities as a whole. However, the religious organization will be subject to an Unrelated Business Income Tax (UBIT) if they do any of the following:

  • Conduct activity that constitutes a trade or a business
  • Regularly carry on this trade or business
  • The trade or business being carried on is not substantially related to the organization’s exempt purpose
  • However, if a religious organization’s activity does meet the above conditions, there is still a chance that it will remain exempt from the UBIT. If all of the work is performed by volunteers, the activity is purely for the convenience of the members of the religious organization, or the business being transacted consists of the selling of merchandise that was donated, the organization can be UBIT-exempt. 

About the Author

Drake Forester, Chief Legal Strategiest - Northwest Registered AgentDrake Forester is the chief legal strategist at Northwest Registered Agent, LLC. Throughout his career, Drake has researched many complicated nonprofit compliance issues and provided whitepaper and publications for many leading nonprofit organizations in the United States.