Religious and Not-for-Profit Entity Formation

Congress has enacted special tax laws that apply to Churches and religious organizations due to their unique status in American society. Churches, religious organizations, and ministers have rights guaranteed to them in the First Amendment of the Constitution of the United States; Congress is prevented from “making any law respecting an establishment of religion, prohibiting the free exercise of religion, or abridging the freedom of speech.”

Churches and religious organizations have the ability to receive favorable treatment under the tax law based on the Internal Revenue Service (IRS) interpretation of tax laws enacted by Congress, Treasury regulations, and Court decisions. In certain circumstances, Churches and religious organizations can be exempt from federal income tax, accept tax-deductible donations, and obtain local tax exemptions.

Churches, religious organizations, and many charitable organizations qualify for exemptions for Federal Income Tax under IRC Section 501(c)(3) and are generally eligible to receive tax-deductible contributions, so long as they meet certain requirements, specified by the IRS.

Depending on the type of tax-exempt organization being formed, there are different types of applications and formation documents which are required to be completed and filed in the appropriate offices, including the application for an exempt organization determination letter, issued by the IRS.

If the IRS grants an application for tax-exempt status, the IRS will notify the organization of its status and will allow the public to search for the organization on their online search tool; Exempt Organizations Select Check, in order to verify the exempt status of the organization and the deductibility of their contributions.

It is possible for an organization which obtained Tax-Exempt Status from the IRS to lose that status and therefore lose their ability to accept tax-deductible contributions. Some reasons why an organization can lose its status is because of any of the following: Inurement to Insiders, Excess benefit transactions to insiders, Private benefit’s to insiders, Substantial Lobbying Activity, Political Campaign Activity, Business Activity, failure to maintain proper business records, and failure to file annual reporting forms, if they are required to be filed (with the IRS and Attorney General’s office).

All tax-exempt organizations, even those not required to file annual reporting forms, are required to maintain books and records, necessary to maintain their status as a tax-exempt organization. The law does not specify a required length of time, however, as a general rule, organizations should keep records for four years.

A donor cannot claim a tax deduction for its donation unless he can substantiate the donation. A donor who donates over $250 and wishes to claim a tax deduction must obtain a contemporaneous written acknowledgment of the contribution from the recipient tax-exempt organization; a receipt. The receipt should state; the name of the entity, the date of the donation, amount of donation, and a statement stating that the church did not give anything in exchange for the donation.

The new tax laws, the tax law and jobs act, allows individuals to deduct up to 60% of its Adjusted Gross Income, up from the old limit of 50%.

If you are interested in opening a church, synagogue, mosque, or non-profit organization it is important to speak with professionals who are familiar with the particular provisions of the tax code and are familiar navigating the numerous different divisions of the IRS.

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