Taxation of Churches and Religious Organizations in California

Taxation of Churches and Religious Organizations in California

Many people assume that, due to First Amendment concerns, federal, state and local governments neither regulate nor tax churches and religious organizations.  In fact, the situation is much more complex.  Below are answers to some frequently asked questions about the taxation of churches and religious organizations at the California and federal level.

California

1. Are churches in California automatically exempt from state franchise and income tax?

No.  A church organized in California must apply to the Franchise Tax Board (FTB) for exemption from franchise and income tax, and must receive a determination letter recognizing the exemption.  Without an FTB determination, the church will be subject to California franchise or income tax and must file the annual corporation franchise or income tax return, Form 100.

2. How does a church file for exemption from California franchise and income tax?

The organization must file a completed form FTB 3500 with an original signature of an individual such as an elected officer, director or authorized representative.  The form and instructions are available here.  The form must be fully completed, with all requested information and documents attached, as well as a $25 application fee made to the “Franchise Tax Board”.

If a church has already received a determination letter from the Internal Revenue Service (IRS) recognizing the church as exempt under section 501(c)(3) of the Internal Revenue Code (IRC), the church may file the much more streamlined form FTB 3500A with the FTB.  That form is available here.

3. Can a church apply for retroactive application of tax exempt status?

Yes.  However, the FTB has discretion as to how far back it grants that status.  In addition, the church must prove that it was organized and operated for exempt purposes from the date it seeks retroactive exemption.

4. Does a church have to file annual income tax returns with the California FTB?

It depends.  Once a church receives the FTB’s determination of exempt status, it is NOT required to file an organization annual information return, Form 199 or Form 199N.  However, there may be other tax returns applicable to the church such as Form 109, California Exempt Organization Business Income Tax Return, to be used if the church receives income greater than $1000 from a trade or business unrelated to its exempt purposes.  It may also be liable for sales or property tax.  In California, there is no general exemption from sales tax for charities.  For more information about sales tax, see the Nonprofit Organization guide to sales and use tax law and regulations put out by the California Board of Equalization, available here.

5. What about religious organizations, as opposed to churches?

To be exempt from income and franchise tax, religious organizations must apply for and receive tax exempt status from the FTB following generally the same procedures as a church. However, religious organizations must file the above mentioned annual information returns, Form 199 or 199N, even after their exempt status has been recognized.

6.  How do I know if my organization is a church or religious organization?

The FTB evaluates the following non-exclusive factors in determining whether an organization qualifies as a church:

  • Whether a permanent place of worship has been established

  • Whether the organization has regular congregations or conducts religious services on a regular basis

  • The background and training of the religious leaders

  • Whether there is a written creed, statement of faith or summary of beliefs

  • Whether religious leaders conduct baptisms, weddings, funeral and other similar services

  • Whether the organization ordains, commissions or licenses ministers or religious leaders.

7. Does a church or religious organization have to pay tax on its real or personal property?

Maybe.  California law provides for three separate exemptions to property tax that may be claimed on property owned or leased by a religious organization: (1)  the church exemption, (2) the religious exemption, (3) the welfare exemption.  These exemptions are not automatic; the religious organization must file for them. The California Board of Equalization has put out a guide to Property Tax Exemptions for Religious Organizations available here that your organization should review if it is contemplating filing for an exemption.

Federal:

1. Does the IRS publish a helpful tax guide for churches and religious organizations?

Yes!  It is available here.

2. Does a church have to apply for tax-exempt status to be exempt from federal income tax?

No.  Churches that meet the requirements of IRC section 501(c)(3) are automatically considered exempt and are not required to apply for and obtain recognition of that status from the Internal Revenue Service.  However a church may choose to apply for and obtain recognition of exemption nonetheless, for example, to provide comfort to donors that their contributions are tax deductible.

3. Does a church have to file an annual information return with the IRS?

No.  However, a church may need to make other tax filings, for example, if it receives income from an unrelated trade or business, or if it is an employer. For a good summary of filing requirements, see IRS Publication 1828.

4. What about a religious organization?

To be recognized as tax-exempt, a religious organization other than a church must apply for and obtain an IRS determination letter recognizing its exempt status.  With limited exceptions, religious organizations other than churches must also file an annual information return, the Form 990 series.

5. What is the difference between a church and a religious organization from the perspective of the IRS?

Church: The IRS looks at a long list of criteria to determine whether an organization is a church for federal tax purposes.  However, the IRS particularly focuses on the following attributes:

  • religious purpose,
  • defined congregations of worshippers,
  • established place of worship, and
  • regular religious services.

Other factors that may be relevant are: distinct legal existence; recognized creed and form of worship; definite and distinct ecclesiastical government; formal code of doctrine and discipline; distinct religious history; membership not associated with any other church or denomination; organization of ordained ministers; ordained ministers selected after completed prescribed courses of study; literature of its own; Sundays schools for the religious instruction of the young; schools for the preparation of its ministers.

To be recognized as tax exempt under Section 501(c)(3), the church must also meet the requirements of the 501(c)(3) operational and organizational tests.

Religious Organization: A religious organization is one that meets the criteria for exempt status under Section 501(c)(3) and is organized for religious purposes.  According to the IRS, these typically include nondenominational ministries, interdenominational and ecumenical organizations and other entities whose specific purpose is the study or advancement of religion. A church is a religious organization for purposes of 501(c)(3) but with special status; not all religious organizations are churches.

Written by: Cameron Holland.