Zenas’ Brief – July 2024

A nonprofit corporation is a business entity that does not have to pay state and federal income taxes. Nonprofits are usually also exempt from paying property and sales taxes, but that depends on the state. Nonprofits are usually mission oriented instead of profit oriented. In other words, nonprofits main goal is to change society.

People may donate to nonprofits, and the nonprofits do not have to claim the donations as taxable income. The donor, however, does not get to claim the donation as a tax deduction unless the nonprofit is also recognized as a 501c3 tax exempt entity by the IRS.

To receive recognition as a tax exempt entity, a nonprofit must file a form 1023 with the IRS and pay a filing fee. The IRS will review the form and decide whether to grant or deny the request to be recognized as a tax exempt entity. If the request is granted, the nonprofit is granted tax exempt status and added to an IRS database so that donors may confirm their donations are tax deductible.

While this is the general process for nonprofits wishing to be deemed tax exempt, churches are unique in that they are automatically considered tax exempt by the IRS, and a tax exempt determination letter is pro forma. In other words, churches do not need a tax exempt determination letter from the IRS for donations to be tax deductible.

So why would a church want a tax determination letter? The tax determination letter may make your life easier in dealing with donors and various government agencies. Not everyone understands that churches are automatically considered tax exempt entities and may require you to provide a tax exempt determination letter. You could fight the person or the agency. But it’ll probably cost you more than paying the filing fee and getting a tax exempt determination letter from the IRS.

Another option is to come under a group exemption letter. A group exemption letter is a letter given to one central organization and may be used by all nonprofits that affiliate with the central organization. A group exemption letter has the same effect as an individual exemption letter and cuts down on the hassle of having multiple like-minded organizations seeking tax exemption.

The UISBC has a group exemption letter, and churches that affiliate with the UISBC may present the group letter as proof of tax exempt status without filing a form 1023 with the IRS and paying a filing fee. The downside to coming under the convention’s group letter is if an agency chooses to reject the group letter and asks you to provide your own letter from the IRS, then you will have to get your own letter. While this is rare, we have seen it occur.

Whether you choose to get your own tax exempt determination letter or come under the convention’s group letter is up to each church. There may be other pros and cons that should be weighed. However, your UISBC Legal Team is here to help you make that decision.

If you have any questions, feel free to contact your UISBC Legal Team.