Church Law and Tax Report

You will get a number of tax-related benefits if the IRS classifies your organization as a church. These include exemptions from federal income tax, unemployment taxes and a few annual information returns. There is no specific definition of church in the Internal Revenue Code; therefore, the IRS has come up with some rules that are quite helpful in deciding the authenticity of the church.

Great Income Tax

Criteria

If a church is able to satisfy the criteria that are there in the section 501(c) (3) of the Internal Revenue Code, it will automatically be granted tax-exempt status. However, if a church has unrelated business income then it is subject to income tax. Tax-exempt status is an act of legislative grace, not a constitutional right (which many of the church officials believe). It is the job of the IRS to decide which church should be given a tax-exempt status. The Pastor is subject to criminal prosecution if there is an attempt being made by the church to evade taxation.

It is quite mandatory for churches to withhold payroll taxes from their employees’ salaries. For clergy, there is special set of rules with regard to Medicare taxes and Social Security payments. Because of treasury regulations, the church needs to describe its routines in its articles of organization. Articles of organization include a trust instrument and a corporate charter.

Keep in Mind

A church cannot be involved in the payment of dividends. In addition, the church should stay away from the transferring of property for less than fair value. The church can lose its tax-exempt status by participating in political campaigns. Clergy are given a freedom to speak for themselves, even on public policies, but they should not do it in official functions. Even if recognized by the IRS, it is quite vital for churches to understand the tax-exempt status limitations.

Congress has recently added a completely new section to the tax code, which deals exclusively with church law and tax reporting. A church can lose its tax-exempt status when the officials of church are not able to answer IRS queries with regard to their financial affairs. The IRS has also come up with a new set of rules for auditing church records.