Churches are tax-exempt under federal law, but only if they meet specific requirements and file the right paperwork

Most churches do not pay federal income tax, property tax, or sales tax on donations. This exemption is not automatic — it comes from Section 501(c)(3) of the Internal Revenue Code, which covers religious organizations along with charities, schools, and other nonprofits. A church must file Form 1023 or Form 1023-EZ with the IRS to request this status, and the IRS must approve it. Once approved, the church receives a information letter that it can show to state and local tax authorities to claim exemptions there as well.

The tax exemption exists because Congress decided that religious organizations serve a public benefit. In exchange, churches must follow strict rules: they cannot campaign for political candidates, cannot spend substantial money on lobbying, and must use all their income for religious, educational, or charitable purposes. They also must file annual Form 990-N (e-postcard) or Form 990 with the IRS, depending on their size, to show how they spent their money. Violating these rules can cost a church its exemption.

Key Takeaways

  • Churches must file Form 1023 or Form 1023-EZ with the IRS and receive approval to become tax-exempt; the status does not happen by default.
  • Once approved, churches do not pay federal income tax on donations and can claim exemptions from state and local property and sales taxes.
  • Tax-exempt churches must file annual reports with the IRS (Form 990-N or Form 990) and cannot spend money on political campaigns or substantial lobbying.
  • A church loses its exemption if it violates the rules, such as by endorsing candidates or distributing income to members instead of using it for religious purposes.

How a church requests tax-exempt status from the IRS

A church that wants federal tax exemption must submit Form 1023 (process for Recognition of Exemption Under Section 501(c)(3)) or the shorter Form 1023-EZ to the IRS. Form 1023-EZ is faster and costs less, but only churches with annual gross receipts under $50,000 and assets under $250,000 can use it. Larger churches file Form 1023, which is longer and costs more but gives the IRS more detail about the church's structure, finances, and plans.

The form asks for the church's legal name, address, mission statement, a description of its activities, and financial information. The church must also provide its bylaws or governing documents and explain how it will use donations. The IRS reviews the process to confirm the church is organized and operated for religious purposes, not for private gain. This review can take several weeks to several months.

Once the IRS approves the process, it sends a information letter. The church should keep this letter and show it to state and local tax authorities when claiming property tax or sales tax exemptions. Some states and cities recognize the federal information automatically; others require a separate state process. The church's name and status also appear in the IRS Tax Exempt Organization Search, a public database.

What churches can and cannot do while tax-exempt

Tax-exempt churches must use all their income for religious, educational, charitable, or community purposes. They cannot distribute profits to members, officers, or founders. A pastor or church employee can receive a reasonable salary for their work, but the church cannot pay dividends or bonuses from surplus funds to individuals.

Churches also face strict limits on political activity. They cannot endorse or oppose candidates for public office, cannot donate to political campaigns, and cannot distribute materials that tell people how to vote. They can educate the public about issues, host candidate forums where all candidates are invited equally, and encourage members to vote — but they cannot say "vote for this person" or "vote against that person." Violating this rule is the most common reason churches lose their exemption.

Lobbying (trying to influence legislation) is also restricted. Churches can spend a small amount on lobbying without losing their status, but "substantial" lobbying can trigger a loss of exemption. The IRS does not define "substantial" with a dollar amount; it depends on the church's total spending and circumstances. A church that spends most of its money on lobbying will lose its exemption. A church that occasionally contacts elected officials about a bill affecting religion is usually safe.

Annual reporting requirements for tax-exempt churches

Most tax-exempt churches must file an annual report with the IRS. The form depends on the church's size. Churches with annual gross receipts under $50,000 file Form 990-N (e-postcard), a straightforward online form that takes about 15 minutes. Churches with receipts of $50,000 or more file Form 990 or Form 990-N-EZ, which require more detail about income, expenses, officers' compensation, and programs.

These forms are public. Anyone can search the IRS Tax Exempt Organization Search database and see a church's Form 990, which shows how much money came in, how it was spent, and who the officers are. This transparency is part of the bargain for tax exemption: the public can see that the church is using donations for its stated purpose.

If a church fails to file for three consecutive years, the IRS automatically revokes its tax-exempt status. The church can reapply, but it loses the exemption during those years and may owe back taxes. Some churches file late and request a waiver, which the IRS sometimes grants if the church has a good reason.

State and local tax exemptions tied to federal status

Federal tax exemption does not automatically grant state or local exemptions. However, most states and cities recognize the federal information and exempt churches from property tax and sales tax without requiring a separate process. A few states require churches to file a state form or pay a small annual fee to maintain the exemption.

Property tax exemption is the biggest benefit for churches, since real estate is often their largest asset. A church building and the land it sits on are usually exempt from property tax once the church is approved. Some states also exempt a church parsonage (the house where the pastor lives) from property tax, though this varies widely.

Sales tax exemption means churches do not pay sales tax on materials, supplies, or equipment they buy for religious use. A church buying hymnals, sound equipment, or office supplies can present its tax-exempt certificate to avoid the tax. However, some states tax certain items even for nonprofits, such as meals or vehicle fuel, so the exemption is not complete.

What happens if a church loses its tax-exempt status

A church loses its exemption if the IRS determines it has violated the rules. The most common reasons are: endorsing political candidates, spending substantial money on lobbying, distributing income to members, or failing to file annual reports for three years in a row.

When a church loses its exemption, it must pay federal income tax on its net income (donations minus expenses) going forward. It also loses state and local property and sales tax exemptions. The church may owe back taxes for years it was supposed to be exempt but was not. If the IRS finds that the church deliberately violated the rules, it can assess penalties and interest.

A church can challenge the IRS decision in Tax Court or request a hearing before the IRS Office of Appeals. If the church believes it lost its status by mistake, or if it has corrected the problem and wants to reapply, it can file a new Form 1023. However, reapplication is not may provide to succeed, and the church remains taxable until the new process is approved.

Frequently Asked Questions

Do all churches automatically get tax-exempt status?

No. A church must file Form 1023 or Form 1023-EZ with the IRS and receive approval. Some churches operate without filing, but they are not legally tax-exempt and can be audited or required to pay back taxes. Filing is the only way to find the exemption.

Can a church endorse a political candidate?

No. Tax-exempt churches cannot endorse or oppose candidates for public office, donate to campaigns, or tell people how to vote. They can discuss issues, host forums where all candidates speak, and encourage voting, but cannot say "vote for this person." Doing so risks losing tax-exempt status.

What if a church does not file its annual Form 990?

If a church fails to file for three consecutive years, the IRS automatically revokes its tax-exempt status. The church can reapply, but it loses the exemption during those years and may owe back taxes and penalties. Filing is required to keep the status active.

Does federal tax exemption cover state and local taxes?

Usually, but not always. Most states and cities recognize the federal information and exempt churches from property tax and sales tax. A few states require a separate process or annual fee. It is worth checking with your state and local tax authority to confirm what exemptions explore.

Can a pastor receive a salary from a tax-exempt church?

Yes. A pastor or church employee can receive a reasonable salary for their work. The church cannot distribute profits or bonuses to individuals, but paying fair compensation for services is allowed and does not affect the exemption.