How You Describe Your Church May Affect Tax Exemption

Learn how describing your church in business terms may affect its tax exemption status.

Last Reviewed: January 9, 2025

Business-savvy church leaders sometimes use business jargon to describe their activities and efforts. A recent IRS denial of exemption for a nonprofit religious organization highlights why this practice can be problematic.

IRS Denial Based on Business Jargon

In a denial letter released on March 8, 2013, the IRS addressed a 501(c)(3) exemption application by a religious organization. The organization described itself as having three divisions: a Ministry Division, a Consulting Division, and a Merchandising Division. While these activities are common among religious nonprofits, the terminology used raised concerns.

The IRS noted frequent use of business jargon, including terms like “divisions,” “branches,” and “brands.” The following excerpt from the ruling illustrates the issue:

“In addition to your frequent references to Taxpayer, Church, and Website as ‘brands,’ you described the majority of your activities in the context of business models, supply chains, marketing strategies, and other, typically business-oriented approaches.”

Understanding the Commerciality Doctrine

The IRS and courts apply a “commerciality doctrine” to determine whether nonprofit organizations qualify for 501(c)(3) exemption. While not explicitly defined in the tax code, this doctrine assesses whether revenue-generating activities are overly commercial, potentially undermining an organization’s exempt purpose.

Using business jargon may give the impression that an organization operates in a commercial capacity, which could affect its exemption eligibility. Though semantics alone aren’t grounds for exemption denial, excessive use of business terms can create unnecessary challenges.

Best Practices for Churches

  • Use mission-focused language: Ensure your descriptions highlight religious or nonprofit purposes rather than commercial operations.
  • Exercise caution with terminology: Avoid terms like “brands,” “supply chains,” or “marketing strategies” unless absolutely necessary.
  • Review your documentation: Audit your bylaws, applications, and public materials to ensure alignment with nonprofit standards.
  • Seek professional advice: Consult with a tax professional to evaluate language and practices that may raise concerns with the IRS or other authorities.

Why Terminology Matters

Excessive business terminology doesn’t align with the core principles of nonprofit organizations. It may inadvertently signal to tax authorities that the organization’s purpose is commercial rather than charitable or religious. While terminology alone won’t result in exemption denial, it can influence IRS evaluations.

Conclusion

Churches and nonprofit organizations should carefully evaluate their use of business jargon to avoid creating the impression of commercial intent. By focusing on mission-driven language, churches can reduce risks and maintain compliance with tax-exempt standards.

FAQs

1. What is the commerciality doctrine?

The commerciality doctrine evaluates whether revenue-generating activities by nonprofits are conducted in a highly commercial manner, potentially undermining their exempt purpose.

2. Can business jargon alone lead to tax exemption denial?

No, semantics alone won’t result in denial. However, excessive use of business terms can influence IRS evaluations and create unnecessary challenges.

3. How can churches avoid IRS concerns about terminology?

Focus on mission-driven language, avoid excessive business jargon, and ensure all documentation reflects nonprofit purposes.

4. Should churches consult a tax professional for guidance?

Yes, consulting a tax professional can help churches evaluate their language, practices, and compliance with IRS standards.

Michael (Mike) E. Batts is a CPA and the managing partner of Batts Morrison Wales & Lee, P.A., an accounting firm dedicated exclusively to serving nonprofit organizations across the United States.
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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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