Institutions like churches have long been tax exempt. Essentially, religious institutions do not have to pay federal or state income taxes as other institutions do. As long as they comply with federal requirements, these institutions won’t go through the tax process as it is commonly known. However, churches still generally need to file an information return every year. The Roseville tax preparers at Cook CPA Group invite you to keep reading as we explain how tax filing for churches works – and which forms you may need to file in order to maintain compliance with the tax code.
Church Tax Exempt Rules
In order to be considered exempt from tax, organizations must comply with IRC 501(c)(3), or 26 U.S. Code § 501(c)(3). This law refers to corporations and certain trusts that are exempt from tax filing. The exemptions may apply to institutions that are “operated exclusively for religious… purposes” (among others, such as “charitable” or “scientific” purposes).
In order to comply and keep the tax exempt status, religious organizations cannot perform or conduct any kind of political campaigns that may interfere in elections for public office. As such, religious institutions must generally refrain from taking part in practices such as lobbying if they want to keep their tax exempt status.
It is important to keep in mind that even when an organization is tax-free, this does not liberate them from keeping documentation related to their activities. As stated at the beginning of this article, churches still need to submit certain forms to the Internal Revenue Service (IRS), in addition to state tax agencies. Our Roseville tax audit accountants discuss this subject in the next section.
IRS Tax Compliance for Churches
Every religious organization must keep proper, up-to-date records of their financial activities. This also includes the filing of any document required by the IRS. For example, the IRS typically requires churches (and other tax exempt organizations) to file an information return each year.
This return is known as Form 990 (Return of Organization Exempt from Income Tax). For some organizations, it may be more practical to file Form 990EZ, which is a “short form” or simplified version of Form 990. If the church’s gross receipts are below $50,000 (for tax years after 2010), it may be sufficient to file an electronic submission called Form 990-N (Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or Form 990EZ).
Additionally, as the IRS notes, “An exempt organization that has $1,000 or more of gross income from an unrelated business must file Form 990-T,” meaning an Exempt Organization Business Income Tax Return (and proxy tax under section 6033(e)). An “unrelated business” is generally considered any business that is both:
- “Regularly carried on” (i.e. continuous)
- Unrelated to furthering the organization’s religious purpose
If you represent a religious institution, you must comply with the IRS requirements. Failing to do so could mean facing heavy fines.
California Tax Filing Requirements for Churches
According to the Franchise Tax Board (FTB), organizations that are tax exempt in California may be required to file one or more of the following:
- FTB 199N (California e-Postcard)
- Form 199 (Exempt Organization Annual Information Return)
- Form 109 (Exempt Organizations Business Income Tax Return)
- Form 100 (Corporation Franchise or Income Tax Return)
The filing of each specific form depends on certain financial amounts. For instance, the requirement to file Form 100 is triggered when the institution has taxable income greater than $100. By comparison, it may be necessary to file Form 109 if the organization’s unrelated business taxable income, discussed above, exceeds a $1,000 threshold.
Depending on the definitions and criteria your organization falls under, you will have to submit the designated form or forms. Navigating through this process may be confusing and complicated to handle. The experienced tax accountants at Cook CPA Group can help you file your IRS and FTB forms in a complete and timely fashion.
California CPAs Offering Church Tax Consultations in Roseville and Sacramento
Federal and state tax rules and regulations can be very difficult to understand and follow. This is especially true for institutions or individuals facing them for the first time. This is why having a knowledgeable and professional CPA, like those at Cook CPA Group, can make it easier to understand and comply with both federal and state tax laws.
At Cook CPA Group, we are well-versed in the unique tax requirements that impact churches and other religious institutions. We have more than 20 years of tax experience, enabling us to assist you with a wide array of state and federal tax issues facing religious institutions. For a free consultation with our Sacramento CPA firm, contact Cook CPA Group online, or call today at (916) 724-1665.