Although churches may receive maintain tax-exempt status through the IRS, this does not mean they are exempt from all taxes. The attorneys for nonprofits at San Luis Obispo’s Toews Law Group, Inc. have highlighted certain compliance concerns that most churches must follow.
Churches and most religious organizations may be classified as tax-exempt organizations under Internal Revenue Section 501(c)(3). A church that is properly incorporated in California and has filed for tax-exempt status under IRS 501(c)(3) may be considered a Nonprofit Religious Corporation.
For example, religious organizations must comply with local building codes, permit and license requirements; deduct and pay payroll taxes; pay property taxes under certain conditions, and file required reports with the State of California.
Taxes, permits, and licenses
Public charities, including religious organizations, are exempt from certain taxes such as most income earned by the organization, certain property taxes, and sales taxes, except under certain circumstances.
Religious organizations still need to comply with local zoning ordinances, fire codes, building codes, permitting, and business license requirements. Fees may be adjusted or waived depending on the type of permit and the jurisdiction.
California property tax laws provide three exemptions that may be claimed on church property:
- The “Church Exemption,” for property owned, leased, or rented by a religious organization and used exclusively for religious worship services
- The “Religious Exemption,” for property owned by a religious organization and used exclusively for religious worship services, and certain school activities. The exemption may also apply to leased personal property
- The “Welfare Exemption,” for property owned by a religious organization and used exclusively for one or more of the above activities or any other religious activities. The exemption may also apply to leased property if both the lessor and lessee qualify. In other words, both the organization and property use must qualify for the exemption.
The conditions that create property taxes exemptions, or the requirements needed to meet the criteria of the three exemptions can be confusing but an experienced nonprofit attorney from San Luis Obispo’s Toews Law Group, Inc. can help religious organizations understand how to qualify for one, or multiple, of the exemptions, and whether or not property taxes must be paid.
Incorporating in California
A corporation formed for the purpose of operating as a church or primarily or exclusively for religious purposes may qualify as a Nonprofit Religious Corporation. To incorporate as a Nonprofit Religious Corporation in California you must draft, execute and file a variety of documents including:
- File Articles of Incorporation with the California Secretary of State.
- Draft and execute Formation and Organizational Documents including Bylaws, Organizational Minutes, and Conflict of Interest Policies;
- Obtain an Employer Identification Number
- Complete and file IRS Form 1023 (and accompanying documents) with the IRS to seek tax-exempt status under 501(c)(3). IRS Form 1023 requires detailed information as well as narrative descriptions of the organization’s current and future planned activities.
- File required California-specific forms, including Form FTB 3500, to claim California nonprofit tax exemption. *California non-profits are not automatically exempt from paying California franchise or income taxes. *
Toews Law Group, Inc. serves as counsel to nonprofit organizations, ranging from family foundations to amateur sports leagues. Many nonprofit organizations on the Central Coast benefit from the firm’s advice and counsel on a variety of legal, tax, and management issues, including how to obtain tax-exempt status, structure the Board of Directors, set up an executive committee, receive donor contributions, acquire reasonable liability insurance, and potentially form for-profit subsidiaries.