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Understanding Religious Organization Tax Laws #2: Tax-Exempt Status

September 23rd

Like many other qualifying nonprofit organizations, churches and religious organizations are exempt from federal income taxes under IRC section 501(c)(3). They are also typically eligible to receive tax-deductible contributions. However, the IRS has very strict rules that govern what organizations may qualify for such benefits. Included among these are the following:

  • The organization in question must be organized and operated exclusively for charitable purposes. This may include activities for religious, educational, scientific, or charitable reasons.
  • Earnings may not be for the personal benefit of any individual person or shareholder. All money must go to the benefit of the organization.
  • The organization may not participate in any political campaigns, or exist to influence legislation in any way.
  • No activities associated with the organization may be in violation of the law or transgress fundamental public policy.

Unrelated Business Income Tax (UBIT)

While the majority of a religious organization’s activities will be tax-exempt, it is common for these groups to also participate in income-producing activities, unrelated to their primary objective. So long as these activities do not constitute a majority of the organization’s activities, they will not jeopardize the group’s tax-exempt status. However, any income-producing activities will be subject to the UBIT, so long as the following three conditions are met:

  • The activity in question constitutes an income-producing trade or business.
  • The trade or business is a regular part or the organization’s activities.
  • The activity in question is not directly related to the organization’s chief directive.

When in doubt, religious organizations should also consult with a qualified tax lawyer to determine if their income-producing activities are subject to tax. Failure to pay tax on any qualifying activities can result in IRS penalties and interest attached to the unpaid tax amount.


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