Do Churches File Tax Returns? What You Need to Know

Churches, as religious institutions, often raise questions about their tax obligations and whether they need to file tax returns. Understanding these requirements is essential for church administrators and donors, as it impacts how churches operate within legal frameworks and maintain transparency with their congregations.

Exempt Organization Status

In the United States, churches are recognized as tax-exempt organizations under Section 501(c)(3) of the Internal Revenue Code. This designation exempts them from federal income tax, provided they meet specific criteria: being organized and operated exclusively for religious, educational, or charitable purposes; ensuring no part of their net earnings benefits private individuals; and avoiding substantial lobbying or political campaign activities.

Unlike other nonprofits, churches are automatically considered tax-exempt if they meet these criteria and are not required to file Form 1023 with the IRS. However, some churches voluntarily file Form 1023 to obtain a determination letter from the IRS, which can reassure donors. To maintain their tax-exempt status, churches must align their activities with their religious purposes and avoid excessive unrelated business activities. The IRS ensures compliance through audits and reviews.

Unrelated Business Income

Churches may sometimes generate unrelated business income (UBI), which comes from activities not substantially related to their exempt purpose. For example, revenue from a church bookstore selling secular books to the public could be considered UBI. Such income must be reported and taxed, even for tax-exempt entities.

To classify an activity as unrelated business, it must meet three criteria: it must be a trade or business, regularly conducted, and unrelated to the church’s exempt purpose. Churches earning UBI must file Form 990-T, Exempt Organization Business Income Tax Return, and pay taxes at the corporate tax rate, currently 21% for 2024. These requirements ensure tax-exempt organizations do not gain an unfair advantage over taxable businesses. Accurate records of income-generating activities are essential for compliance.

Charitable Contributions and Deductibility

Donors often wonder about the tax implications of contributions to churches. Under the U.S. tax code, contributions to churches can be deductible for taxpayers who itemize deductions. Section 170 of the Internal Revenue Code allows deductions for donations to qualified organizations, including churches, provided the contributions are voluntary and made without receiving goods or services in return.

For individual taxpayers, the deduction is generally limited to 60% of their adjusted gross income (AGI) for donations to churches or other public charities. This limit may vary depending on the type of donation. Donors should document their contributions and ensure they receive receipts for donations over $250. Churches are required to provide donors with documentation that includes the church’s name, the contribution amount, and, if applicable, a description of non-cash contributions or the value of goods or services provided in exchange. This transparency builds trust and ensures regulatory compliance.

Consequences of Noncompliance

Noncompliance with tax obligations can have serious consequences for churches, including the loss of tax-exempt status. If a church violates the conditions of its exemption, such as engaging in excessive lobbying or political campaigning, the IRS may revoke its status, subjecting the church to federal income tax on all its income.

Failure to report unrelated business income accurately can result in financial penalties and interest charges. Late filing or underpayment of taxes can strain a church’s finances. Beyond financial repercussions, noncompliance can damage a church’s reputation, leading to diminished donations and support. Transparency and accountability are critical for maintaining the trust of congregations and donors.

Frequent Misconceptions

Misunderstandings about churches and their tax obligations are common. One misconception is that churches are exempt from all forms of taxation. While they are generally exempt from federal income tax, churches may still be subject to other taxes. For instance, they must pay payroll taxes for employees, such as Social Security and Medicare, reported through IRS Form 941. Property taxes may also apply if portions of church-owned property are used for non-religious purposes, such as operating a for-profit business.

Another misconception is that churches are not required to maintain financial records or file documentation with the IRS. While churches are not obligated to file annual Form 990s like other nonprofits, they must keep accurate records of income, expenses, and contributions to ensure compliance with tax laws. Churches earning unrelated business income must file Form 990-T. Additionally, they must issue W-2s or 1099s for employees and contractors. Failing to maintain proper documentation can lead to audits, penalties, and the loss of tax-exempt status. These misconceptions highlight the need for a clear understanding of the responsibilities tied to tax-exempt status.