The Group Exemption, Proving Your Church’s Tax-Exempt Status, and Your Church’s EIN:  What Local Churches Need to Know

This post was updated on June 7, 2024 to account for the IRS’s recent review of its guidance in this matter and to clarify the difference between the IRS Business Master File for Exempt Organizations and the IRS’s Tax Exempt Organization Search Tool.

Do you know about the United Church of Christ’s group exemption?  Do you need to prove that your Local Church is tax-exempt?  Do you know the difference between “nonprofit,” “tax-exempt,” and “501(c)(3)?”  These terms, while often used interchangeably, have distinct meanings under the law, and come with different legal obligations.  This post explains how these terms apply to your Local Church, how to prove your church’s tax-exempt status, and the importance of maintaining your church’s federal Employer Identification Number, or EIN.

Your Local Church Is A Nonprofit

Nonprofit, or not-for-profit, organizations are created under state law.  Unlike a for-profit business that has owners and shareholders, a nonprofit organization does not have owners.  It doesn’t distribute its income to members, directors, or officers (though it may have compensated employees).  Business forms for nonprofits depend on state law, and may include corporations, unincorporated associations, partnerships, and other forms.  In some states, a nonprofit corporation may also be called a non-stock corporation.  Typical nonprofits include businesses like churches, some schools, government agencies, political organizations, homeowners’ associations, and labor unions.  Some of these organizations have charitable and/or religious purposes, but others do not.  Nonprofits may have some special privileges under state law.  For example, nonprofits may be exempt from state sales and/or income tax, and may be protected from certain legal claims. Other states may tie state income or sales tax exemption to federal tax-exempt status (see below).

Churches are nonprofit organizations.  A church is usually organized under a nonprofit corporation statute or a religious corporation statute; churches may also be unincorporated associations.  Churches, as nonprofit businesses, may be required by state law to file annual reports with the secretary of state; some states exempt churches from reporting.  Churches may also be required to register as a charity with the state attorney general’s office, though they may be exempt from filing annual reports.  Local Churches should be familiar with these laws in their state, keep their reporting up to date, and apply for any exemptions from reporting if required.  Churches should also designate a registered agent for the service of legal documents through the secretary of state’s office.  If your church changes its name or its address, or needs to change its registered agent, be sure to update the information with these state entities.  Update your Conference as well.

Your Local Church Is Tax-Exempt

Organizations are given tax-exempt status from federal income tax under federal law, through the Internal Revenue Service (IRS).  Organizations are commonly both nonprofit and tax-exempt.  But a nonprofit is not automatically a tax-exempt organization.  The federal statute that governs tax exemption for organizations is 26 U.S.C. § 501.  Many different types of organizations can be tax-exempt, including religious, charitable, and educational organizations, but also civic leagues, business leagues, recreation clubs, fraternal orders, some life insurance associations, some electric companies, and others.  These organizations are exempt from federal income tax, but are required to pay tax on unrelated business income.  Most tax-exempt organizations are required to file an application for recognition of tax-exempt status with the IRS, under 26 U.S.C. § 508(a), and to file an annual information return, called a Form 990.  And, only donations to certain types of tax-exempt organizations qualify for charitable contribution deductions.

Your Local Church Is A 501(c)(3)

The type of tax-exempt organization with which most people are familiar is exempt under 26 U.S.C. § 501(c)(3), and indeed, these organizations are often referred to simply “c3s.”  These organizations include (but are not limited to) religious, charitable, and educational organizations.  Section 501(c)(3) is the statute under which churches are eligible for tax-exempt status.  While most 501(c)(3) organizations are required to apply for recognition of tax-exempt status, churches are not!  Another statute, 26 U.S.C. § 508(c)(1)(A), exempts churches from applying for tax-exempt status.  Your Local Church is automatically tax-exempt, and doesn’t have to file an application!  Churches are also exempt from filing annual information returns, Form 990, with the IRS.

Careful readers of the statute will note that it applies to “[c]orporations, and any community chest, fund, or foundation.”  The IRS, however, treats an unincorporated association as a corporation for the purposes of the statute.  So churches that are not incorporated may still be tax-exempt.

Churches must maintain the qualities and attributes that the IRS uses to determine whether an organization is a church to qualify for treatment as a church under § 501(c)(3).  Churches must also meet the other requirements of being a 501(c)(3):

• it must be organized and operated exclusively for religious, educational, scientific or other charitable purposes;
• net earnings may not inure to the benefit of any private individual or shareholder;
• no substantial part of its activity may be attempting to influence legislation;
• the organization may not intervene in political campaigns; and
• the organization’s purposes and activities may not be illegal or violate fundamental public policy.

While churches are exempt from applying for recognition of tax-exempt status, other religious organizations are not.  If you are in a religious organization setting please consult with a CPA for more information on applying for tax-exempt status. 

How To Prove The IRS Recognizes Your Local Church As Tax-Exempt

An organization that applies for and is granted recognition of tax-exempt status with the IRS receives a determination letter from the IRS and is listed in the IRS’s Tax Exempt Organizations Search Tool (“TEOST”).  Under Internal Revenue Code Section 170, donors are permitted to deduct charitable contributions to 501(c)(3) organizations, and grantors and vendors may offer grants or special benefits to 501(c)(3) organizations. When asked for proof of 501(c)(3) status, the organization can provide a copy of that determination letter, and the donor or grantor can verify the information in the TEOST.  

A Local Church may also be asked for proof of its tax-exempt status in connection with a donation or other transaction. Because most Local Churches don’t apply for recognition of tax-exempt status, they don’t have determination letters and will not appear in the TEOST.  Donors are allowed to claim a charitable deduction for donations to a church that meets 501(c)(3) requirements even though the church has not received IRS recognition of tax-exempt status.  Some grant-making organizations and vendors, however, may have policies that require some proof of tax-exempt status, even from churches. 

So how does a Local Church in the United Church of Christ prove to donors, grantors, and vendors that they are tax-exempt?

The United Church of Christ, as a denomination, received a determination letter from the IRS in 1964 granting it a group ruling on the tax-exempt status of settings in the United Church of Christ.  Local Churches, Conferences, and Associations, as well as certain other organizations, are included.  The United Church of Christ Yearbook acts as the official subordinate organization listing for the purposes of the group ruling.  This ruling, often referred to as a “group exemption,” recognizes Local Churches of the United Church of Christ as tax-exempt. 

The IRS provides specific guidance on how the tax-exempt status of a group ruling member, such as a Local Church, can be verified in its Publication 4573, Group Exemptions:

“How do I verify that an organization is included as a subordinate in a group exemption ruling?

The central organization that holds a group exemption (rather than the IRS) determines which organizations are included as subordinates under its group exemption ruling. Therefore, you can verify that an organization is a subordinate under a group exemption ruling by consulting the official subordinate listing approved by the central organization or by contacting the central organization directly. You may use either method to verify that an organization is a subordinate under a group exemption ruling.

How do donors verify that contributions are deductible under Section 170 with respect to a subordinate organization in a Section 501(c)(3) group exemption ruling?

Subordinate units that are included in group exemption letters are not listed separately in Tax Exempt Organization Search (Publication 78 data). Donors should obtain a copy of the group exemption letter from the central organization. The central organization’s listing in Tax Exempt Organization Search will indicate that contributions to its subordinate organizations covered by the group exemption ruling are also deductible, even though most subordinate organizations are not separately listed in Tax Exempt Organization Search or on the Exempt Organizations Business Master File. Donors should then verify with the central organization, by either of the methods indicated above, whether the particular subordinate is included in the central organization’s group ruling. The subordinate organization need not itself be listed in Tax Exempt Organization Search or on the EO Business Master File. Donors may rely on central organization verification about deductibility of contributions to subordinates covered in a Section 501(c)(3) group exemption ruling.”

While a secular organization that maintains a group ruling for its affiliates is required to annually update the IRS Business Master File for Exempt Organizations with its list of group ruling members, churches do not have this requirement.  Because of this, the United Church of Christ does not provide the IRS with the names of its member churches. Additionally, as stated above, churches will not appear in the TEOST, even though they are recognized as tax-exempt through the United Church of Christ, unless they have filed a Form 1023 or 1023-EZ for recognition of tax-exempt status. Some Local Churches have asked whether their information will appear in the TEOST if the National Setting updated the IRS Business Master File for Exempt Organizations with its list of group ruling members. The TEOST will only reflect information from organizations that have filed a Form 1023 or 1023-EZ. TEOST does not pull information from the Business Master File.

In compliance with the IRS guidance in Publication 4573 as stated above, the United Church of Christ National Setting, through the Office of General Counsel, provides a letter indicating that a Local Church is in good standing with the denomination as well as a copy of the group exemption determination letter to any Local Church that is listed in the Yearbook that requests one.  Be certain that you keep your church’s name and address up to date with the Conference, as we can only provide a letter to the church name and address that appears in our Data Hub.  

In the vast majority of cases, this letter and the accompanying document are enough to satisfy anyone requesting proof of the Local Church’s tax-exempt status, and indeed, is a method the IRS authorizes to verify tax-exempt status.  If your Local Church is dealing with an organization that is requesting proof of your Local Church’s tax-exempt status, but is not familiar with the rules on group exemptions or churches, it may be helpful to provide the organization with a copy of the IRS’s publication on group exemptions along with the letter from the United Church of Christ.  You can request a group exemption letter by clicking “Request Group Exemption Letter” on this page.   

Obtaining And Maintaining An Employer Identification Number, Or EIN

Local Churches, as subordinate organizations in a group ruling, must have their own Employer Identification Numbers, or EINs.  A Local Church obtains an EIN from the IRS.  Churches can apply online.  This EIN is separate from the EIN that is associated with the United Church of Christ’s group exemption, which appears on the group exemption letter.  A Local Church should never use the United Church of Christ’s EIN for banking, payroll taxes, filings with the secretary of state or attorney general, grant applications, or other business.  The Local Church’s own EIN must be used in these instances.  The United Church of Christ group exemption EIN is only used to verify the group exemption to which the Local Church belongs.  Conducting other business under the United Church of Christ EIN may have serious consequences for the Local Church and the denomination that can be expensive and time-consuming to repair.

Most Local Churches already have EINs that they have obtained to do ordinary business, like pay payroll taxes for lay workers and open bank accounts.  Some churches believe they do not need an EIN because they do not have employees, or they only have a pastor for whom they do not withhold taxes.  Even these churches should establish an EIN, as it will likely be needed in the future for banking or corporate purposes, and is required as a member of a group exemption.

Once your church has established an EIN, keep a record of it.  If your Local Church moves or changes its name, inform the IRS so that the information associated with the EIN can also be updated. 

Other Resources

I encourage all Local Church leaders to read the IRS’s Tax Guide for Churches and Religious Organizations.  It is brief, relatively easy to understand, and contains specific examples of how to maintain your church’s tax-exempt status.

The information provided in this article is not legal advice.  If you need legal advice, please consult with an attorney.