Churches enjoy automatic recognition as tax-exempt organizations under Internal Revenue Code Section 501(c)(3). That status brings significant benefits — exemption from federal income tax, eligibility to receive tax-deductible contributions, and often relief from certain state and local taxes.

But tax exemption is not unconditional.

While revocation is rare, it does happen. More often, churches face audits, penalties, excise taxes, or reputational damage because leaders misunderstand what the law requires.

Here are five of the most common ways churches put their tax-exempt status at risk.

The most well-known restriction involves churches and political candidates — although change may be afoot.

Under current federal tax law, a church may not directly or indirectly participate in, or intervene in, any political campaign supporting or opposing a candidate for public office. This includes:

The prohibition applies to federal, state, and local races.

It’s important to note that a limited amount of issue advocacy is still permitted for tax-exempt entities under the federal tax code. Churches may speak about moral and social issues. They may educate voters. They may encourage civic engagement. They need only exercise caution about the amount of time and resources spent on such activities when they relate to specific ballot measures or legislation (though the IRS is vague about how much is too much).

And, even with the 501(c)(3) rules in place, the First Amendment rights of the free exercise of religion and freedom of speech still protect ministers and their abilities to preach about social and moral issues.

Church leaders are wise to review the rules and monitor developments, especially heading into the 2026 midterm elections. 

Lastly, a legal challenge to the Johnson Amendment by four ministries, including the National Religious Broadcasters and two churches, was dismissed in April 2026 by a federal judge in Texas on jurisdictional grounds. The plaintiffs indicated plans to appeal. Until then, the Johnson Amendment—and all tax guidance associated with it—remains in place.

A church must operate exclusively for exempt religious purposes. That means its income and assets cannot improperly financially benefit private individuals.

Two issues matter here: private inurement and private benefit.

Private inurement occurs when insiders — such as pastors, board members, or key employees — receive an economic benefit that far exceeds what they provide in return (also known as an excess benefit transaction). Examples include:

Private inurement subjects insiders to excise taxes of up to 225 percent of the benefit received. 

Those who approved the benefit (such as church board members) also face a tax of up to 10 percent (capped at $20,000). 

Certain types of transactions can automatically trigger these penalties, too (even if the amounts involved are relatively insignificant). One example is a church’s payment or reimbursement of a pastor’s personal or business expenses under a nonaccountable arrangement. Another example is the failure to report any fringe benefit an insider receives.

Additionally, the church itself faces the loss of its tax-exempt status for any private inurement and excess benefit transactions that occur on its watch.

Private benefit prohibitions are based on similar principles, but work differently. 

A private benefit is one that benefits an individual or business, regardless of whether the persons who benefit are insiders or not.  It involves benefiting these individuals or businesses in a way that is more than incidental to the church’s exempt purpose.

The primary risk is the church’s loss of its tax-exempt status.

To avoid problems with private inurement or private benefit, leaders should: 

Aside from tithes and offerings, churches may generate income from a variety of activities. They may sell books, operate cafés, rent facilities, host conferences, or run seasonal fundraisers. 

Alternative revenue alone does not necessarily result in taxes or threaten exemption. 

But the manner in which the activities are conducted, along with other facts and circumstances, may trigger unrelated business income tax (UBIT) that the church must pay, and expansive ongoing activities also may call the church’s tax-exempt status into question.

Warning signs include:

Occasional fundraising events are generally safe. But sustained, commercial-like operations require careful analysis.

Church leaders should regularly evaluate whether revenue-generating activities advance — or distract from — their churches’ exempt religious purposes.

Tax exemption requires organizational integrity.

Churches are not required to annually file Form 990. But poor governance increases their audit risk, weakens their legal protections, and makes them more vulnerable to exploitation.

Red flags include:

Sloppy administration does not automatically revoke exemption. But patterns of mismanagement can support findings of private inurement, excess benefit transactions, or operational failures — things that can jeopardize the church’s tax exemption.

Strong governance is not optional. It is part of demonstrating that the church operates exclusively for religious purposes and stewards charitable assets appropriately.

Clear policies, documented board minutes, and transparent compensation practices are essential safeguards.

A church must be organized and operated primarily for religious purposes.

When facilities, funds, or leadership are consistently used for activities unrelated to ministry, exemption concerns arise.

Examples may include:

Occasional facility rentals at fair market value are generally permissible. However, problems develop when non-exempt activities become central rather than incidental.

Intent matters. So does documentation.

If questioned, a church must demonstrate how its activities further its religious mission.

Loss of tax-exempt status can happen.

Even if it doesn’t, other risks from mishandling these issues can arise, including audits, excise taxes, penalties, civil lawsuits, and reputational damage. Most problems stem from misunderstanding boundaries around political activity, compensation, business ventures, and governance.

Church boards and senior pastors should regularly review:

Tax exemption is not merely a status. It is a legal framework that requires ongoing compliance.

Church Law & Tax provides in-depth analysis, case studies, and practical guidance to help leaders protect their church’s exempt status while advancing their mission confidently and lawfully.

If your church has not reviewed these risk areas recently, now is the time.