Q&A: What Would Happen If We Lost Our Tax-Exempt Status?

I am aware that churches risk the loss of their tax-exempt status if they participate

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?

Loss of your church’s exemption from federal income taxation would have several consequences, including the following:
  • The church’s net income would be subject to federal income taxation.
  • The church’s net income would be subject to state income taxation (except in the few states not having an income tax).
  • Donors no longer could deduct charitable contributions they make to the church.
  • The church would be ineligible to establish or maintain 403(b) taxsheltered 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 tax under state and federal law.
  • The church could suffer an adverse impact on its zoning classification.
  • The church could lose its preferential mailing rates.
  • The church could lose its exemption from registration of securities under state law.
  • Nondiscrimination rules pertaining to various fringe benefits (including an employer’s payment of medical insurance premiums) would apply.
  • In some cases a minister’s housing allowance may be affected.
  • In some cases the exempt status of ministers who opted out of Social Security may be affected.
  • The significant protections available to a church under the Church Audit Procedures Act may no longer apply.
  • The exemption of the church under the state charitable solicitation law may be affected.
  • The exemption of the church from the ban on religious discrimination under various federal and state civil rights laws may be affected.
  • The exemption of the church from the public accommodation provisions of the Americans with Disabilities Act may be affected.

Clearly, any activity that jeopardizes a church’s exemption from federal income taxation is a matter that must be taken seriously.

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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