Understanding the Consequences of Losing Tax Exemption for Churches

Learn what happens if your church loses its tax-exempt status and how it could affect finances, donations, and legal protections.

Last Reviewed: January 1, 2025

Q: I am aware that churches risk the loss of their tax-exempt status if they participate in political campaigns. Several people in our congregation would like for our church to be more politically active. As a practical matter, what difference would it make if we lost our tax-exempt status?


Implications of Losing Tax-Exempt Status

Losing tax-exempt status would significantly impact your church in several ways. Here are the key consequences:

  • The church’s net income would be subject to federal and state income taxation (except in states without an income tax).
  • Donors would no longer be able to deduct their contributions to the church.
  • The church would be ineligible to establish or maintain 403(b) tax-sheltered annuities.
  • The church could lose its property tax exemption under state law.
  • The church could lose its sales tax exemption under state law.
  • The church could lose its exemption from unemployment taxes under state and federal law.
  • There may be a negative impact on the church’s zoning classification.
  • Preferential mailing rates may no longer apply.
  • State laws may require the church to register its securities.

Impact on Ministers and Congregants

  • Nondiscrimination rules for certain fringe benefits, such as medical insurance premiums, would apply.
  • The housing allowance for ministers may be affected in some cases.
  • The exempt status of ministers who opted out of Social Security could be impacted.
  • Protections under the Church Audit Procedures Act would no longer apply.
  • State charitable solicitation exemptions may no longer apply.
  • The church may lose exemptions under federal and state civil rights laws regarding religious discrimination.
  • The church may no longer qualify for exemptions under the public accommodation provisions of the Americans with Disabilities Act (ADA).

Why Churches Must Be Cautious

Clearly, any activity that jeopardizes a church’s tax-exempt status must be addressed with utmost seriousness. The potential consequences span financial, legal, and operational domains, directly impacting your congregation and mission.

FAQs About Losing Tax-Exempt Status

1. Can a church regain its tax-exempt status after losing it?

Yes, but the process involves reapplying with the IRS, demonstrating compliance, and meeting all requirements.

2. What activities could cause a church to lose its tax exemption?

Engaging in political campaigns, excessive lobbying, or operating in a commercial manner unrelated to its mission can jeopardize exemption.

3. How does losing tax exemption affect church donations?

Donors would no longer receive tax deductions for their contributions, potentially decreasing giving.

4. Are there alternatives to mitigate risks of losing exemption?

Consult legal counsel to ensure compliance with tax laws, and implement governance practices that align with IRS requirements.

Additional Resources

The editorial team of Church Law & Tax is made up of Matthew Branaugh, attorney-at-law, and Rick Spruill, digital content manager.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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