HARRISBURG – Understanding the complexities of the legal existence of a church can be overwhelming to a pastor, church planter, church leader, treasurer, etc. The goal of this document is to help clearly articulate what the Employer Identification Number (EIN), 501(c)(3) Federal Tax Exemption, and the State Sales Tax Exemption are and how the church should utilize them. In my experience many church leaders have expressed confusion over these items and have even tried to use them interchangeably. All three of these items play an integral part in the church’s existence. Below will be an explanation of the three areas and how they affect the church.
EMPLOYER IDENTIFICATION NUMBER
An EIN (Employer Identification Number) is a number given to an organization by the Federal Government to identify the business entity. A church will apply for an EIN through the IRS website (https://sa.www4.irs.gov/modiein/individual/index.jsp) or complete IRS Form SS-4. Upon approval of the EIN application your church will receive a letter that will include the church’s EIN number and how it is required to file payroll wage taxes. It is important to note at this point that the EIN application and approval is not the same thing as a Federal 501(c)(3) Tax Exemption. In fact, the EIN really has nothing to do with the Federal or state sales tax exemptions. A church must have an EIN if it is incorporated or if it has employees (W-2 or 1099).
So why does my church need an Employer Identification Number (EIN)?
- This EIN creates the entity’s existence with the Federal government.
- The EIN is need to open a bank account,
- The EIN is needed to apply for certain insurances,
- The EIN is needed to apply for state and local wage tax withholding, and
- The EIN is used to prove the entity’s existence to vendors.
Can my church use a Denominational Headquarters or another ministry’s EIN? No, each church needs to secure its own EIN. The only way one would use the same EIN is if all parties using the same number are legally the same corporation/organization.
501(c)(3) FEDERAL TAX EXEMPTION
What is the 501(c)(3) Federal Tax Exemption?
The 501(c)(3) Tax Exemption status is a Federal recognition of the exemption of most Federal income/revenue taxes if the organizations activities have the following purposes: religious, charitable, and/or educational. Recognition of this 501(c)(3) exempt status is granted to qualifying nonprofits.
How does this 501(c)(3) tax exemption help my church?
Having this exemption benefits churches through the tax deductible nature of donations, property tax exemptions, corporation tax exemptions, and the ability to qualify for different types of grants offered by organizations.
How do I obtain this 501(c)(3) tax exemption?
There are two main ways to obtain 501(c)(3) tax exempt recognition:
- The first option is to complete IRS form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. This option requires the completion of eleven detailed parts in the application and many organizations will hire a company that specializes in 501(c)(3) exemptions to complete the application for them. There is also a 1023 EZ form that was released a few years ago that allows smaller nonprofits the ability to qualify for a more streamlined application for the 501(c)(3) status. This would only pertain to a church that had annual revenues of $50,000.00 or less for the past three years or anticipates its revenues will be $50,000.00 or less for the next three years. Application fees range from $400.00 to $850.00.
- The second option is to fall under the Group Exemption of a denominational organization. The IRS sometimes recognizes a group of organizations as tax-exempt if they are affiliated with a central organization. This avoids the need for each of the organizations to apply for an individual exemption. A group exemption letter has the same effect as an individual exemption letter except that it applies to more than one organization. The Executive Committee of the SBC in Nashville, TN allows for cooperating SBC churches to fall under their group exemption alleviating the need for each church to secure its own 501(c)(3). Churches are eligible for group exemption consideration with the Executive Committee of the SBC if the church meets the following criteria:
- The church is constituted,
- The church is fully & financially supportive of SBC causes, and
- The church is recognized by the Baptist Resource Network as a cooperating SBC church.
To inquire with the Executive Committee of the SBC about group exemption please contact them at 615.782.8618.
If your church has not secured one of the above mentioned options for tax exemption I would recommend it does so. A church can operate without a 501(c)(3) tax exemption status but having the exemption is a great safeguard for the ministry and the persons financially contributing to the ministry. The benefits to having exemption coverage for your church by far outweighs operating without the exemption.
Can my exempt status be revoked?
Yes, a church can lose its 501(c)(3) tax exemption. If the church has its own tax exemption they can lose it several different ways. The most common are:
- Failure to maintain sufficient and accurate financials and charitable contribution receipts.
- Failure of the church to have at least an annual business meeting with recorded minutes of the meeting.
- Personal benefit, gain, or inurement – granting personal gains to someone within the organization.
- Political Campaigning or Electioneering – Campaigning for or against an elected office while acting in an official church capacity.
- The church fails to operate within and in accordance with its exempt purpose.
- The church generates excess income from regularly carried out activities not related to its exempt purpose.
For more information on how to remain compliant with the IRS please visit www.irs.gov and read the Compliance Guide for 501(c)(3) Public Charities.
What the Federal 501(c)(3) Tax Exemption is not
The tax exemption is not:
- An exemption from paying wage (payroll) taxes
- A state sales tax exemption
- An exemption of all revenue tax. For example, churches remain liable for unrelated business income tax & sales and use tax (tax on the sale of church goods and the purchase of out of state goods).
STATE SALES TAX EXEMPTION
The state sales tax exemption is a great way for churches to save money on most of its purchases. Churches making purchases, which are normally taxable, to fulfill its exempt purpose can usually receive a sales tax exemption on the items purchased. Each state that offers a state sales tax exemption operates differently and requires its own criteria in order to qualify.
To Qualify in PA
Each church must apply for its own exemption and there is no fee to apply. This is done by completing the PA Form REV-72, Application for Sales Tax Exemption. This application is accompanied by thorough instructions to guide your church through the application. This form can be found by simply doing an internet search on “PA Form REV-72, Application for Sales Tax Exemption” or by going to the state Department of Revenue website. Though most churches that apply will be granted exemption, it is possible that even though you have Federal Tax Exemption that your church may not qualify for a State Sales Tax Exemption. If the church is granted state sales tax exemption, then it will use PA Form REV-1220 for each qualifying purchase that the church makes. This form can also be found by simply doing an internet search or by going to the state Department of Revenue website.
To Qualify in NJ
Each church must apply for its own exemption and there is no fee to apply. This is done by completing the New Jersey Form REG-1E which is the Application for ST-5 Exempt Organization Certificate. This application process is short and simple but does require that the church provide a list of documents with the application. This form can be found by simply doing an internet search on “NJ Form REG-1E, Application for ST-5 Exempt Organization Certificate” or by going to the state Department of the Treasury website. A copy of the Approved ST-5 Exempt Certificate must be presented to a vendor at the time of any qualifying purchase.
- The state sales tax exemption is not automatically granted if your church has 501(c)(3) exemption. Your church must qualify according to the state in which it resides. This is determined by completing your state’s application for sales tax exemption.
- There is no “group exemption” allowance for state sales tax exemption like there is for the Federal Tax Exemption. Each church must apply and secure its own state sales tax number.
- The church must make payment using organization funds and must provide vendors with a copy of the organization’s tax exemption. If the person making the purchase pays with personal funds, exemption from sales tax does not apply, even if the purchaser will receive reimbursement from the organization.
- Businesses can refuse to accept the tax exemption at the time of purchase. If they do, the church will need to pay the tax and petition with the state to receive a refund of taxes paid.
- There are certain purchases that do not qualify for Sales Tax Exemption and this varies by state. A few examples of purchases that would not qualify for the sales tax exemption are items such as hotel or luxury taxes, taxes on certain construction projects, and taxes on the purchase of tools. For more information on these items please contact your state exemption office.
- A church may qualify for state sales tax exemption in multiple states if they have reason to pursue operations and purchases in a different state. Usually this occurs when a church is located near a state line. To inquire if you qualify contact the state sales tax exemption office in the other state.
- The state sales tax exemption does apply to state tax on utilities. The church can request a tax exemption on utilities by contacting the utility provider.
Understanding how the Employer Identification Number (EIN), 501(c)(3) Federal Tax Exemption, and the State Sales Tax Exemption are used are of importance to all churches. My hope is that this article highlights the importance of each of the three legal matters of the church and at the same time helps unpack any confusion that churches have on these matters. Understanding should lead the church to know how to better utilize and benefit from such items. Please share this article with your church treasurer so that they may have a clear understanding of these legal matters.