Explainer: What you should know about churches and tax exemption

October 18, 2019

In a recent forum on LGBTQ issues for Democratic presidential candidates, former Texas Congressman Beto O’Rourke said that churches and other religious institutions that oppose same-sex marriage should lose their tax-exempt status. Andrew T. Walker wrote about O’Rourke’s statement.

Here is what you should know about churches and tax exemption.

What does it mean to be “tax-exempt”?

Tax exemptions reduce or entirely eliminate an obligation to pay tax on income or transactions at the local, state, or federal level. Tax-exempt usually refers to the status of certain businesses and organizations that have a general federal tax exemption. Donations to such tax-exempt organizations are usually tax deductible (i.e., they reduce the amount of taxable income and thus the amount of tax required to be paid).

What types of organizations are tax-exempt?

An organization may qualify for tax-exempt status if it meets the qualifications under subsection 501(c) of the Internal Revenue Code (i.e., the section of the U.S. legal code that addresses federal tax law). The most common and well-known type is 501(c)(3)—corporations, funds, or foundations that operate for religious, charitable, scientific, literary, or educational purposes. These types of organizations are more commonly referred to as nonprofits or charities.

Currently, there were 29 types of organizations listed under 501(c). Some examples are 501(c)(4) [Nonprofit organizations that promote social welfare], 501(c)(5) [Labor, agricultural or horticultural associations], 501(c)(6) [Business leagues, chambers of commerce, etc. that are not organized for profit], and 501(c)(7) [Recreational organizations].

What is the difference between a nonprofit and a charity?

These terms are often used interchangeably. But while all charities are nonprofits, not all nonprofits are charities. The one condition shared by all nonprofits is that they do not pay out profits. As the IRS states, “No part of the organization’s net earnings can inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization.”

What constitutes a charity, though, is more difficult to define, because the meaning of the term has changed over time. Prior to the twentieth century, charity was usually reserved as a designation for organizations whose purpose was to provide relief to the poor. But the term has expanded to include a variety of activities that promote the public interest or social welfare. The IRS notes that on numerous occasions courts and other authorities have expressed the view that the term “charity” cannot be restricted or confined. Under IRS rules, organizations that take opposing perspectives on what promotes public welfare—such as Americans United for Life and Planned Parenthood Federation of America—can both be classified as charities.

Why does the government provide some tax exemption to 501(C) organizations?

The rationale for granting tax exemption to certain private entities, according to the IRS, is based on the theory of shared social responsibility. As the IRS points out, the government and its citizens jointly share the responsibility for the well-being of the entire nation:

Early governmental authorities granted tax exemption because they were either unable or unwilling to satisfy obvious social needs. Later, exemption was extended or continued for organizations whose purposes and activities were socially desirable. Today, of course, government conducts many of the activities previously done only by private philanthropy. Even today some needs can be better met by private philanthropy. The present system for tax exemption reflects this philosophy. This dual system of public and private philanthropy seems likely to persist well into the indefinite future.

Do churches have to file for tax-exempt status?

No. Under Internal Revenue Code 508(c), churches are exempt from having to notify the IRS that they quality as an 501(c)(3). If a church meets the requirements of 501(c)(3), it is automatically exempt from federal income tax.

Doesn’t this allow any group to claim to be a church or religious organizations and avoid paying taxes?

The IRS is tasked with neutral and impartial enforcement of the Internal Revenue Code and is additionally constrained by the First Amendment to the Constitution, which mandates governmental neutrality toward churches and religious organizations.

Yet as the IRS clarifies, this “does not mean that these First Amendment rights are absolutes or can be asserted as a screen for any kind of conduct. While the court has found within the religious clauses of the First Amendment both a freedom to believe and a freedom to act, it has also found that the former is absolute while the latter is not. (Reynolds v. U.S., 98 U.S. 145 (1978).)” What this means is that when a group makes its beliefs and programs a basis for seeking tax exemption, the IRS “has an obligation to inquire whether such preferences should appropriately be extended to such group.”

There are two basic questions the IRS considers when determining whether a church or religious organization is described in 501(c)(3) and qualifies for tax-exempt status:

(1) Are the organization's beliefs and tenets sincerely held?

(2) In practicing its beliefs, does the organization meet all the requirements for 501(a) exemption set out in 501(c)(3)?

As the federal courts have ruled, the Constitution does not condone a taxpayer's subversion of the law through the guise of religious belief. To be entitled to the protection of the First Amendment to the U.S. Constitution the religious belief must be sincerely held. For instance, if the IRS found evidence indicating that the founder or members formed a “church” to avoid drug laws, the IRS could properly question the sincerity of the religious belief.

Despite this oversight power, the IRS has seldom cited the sincerity requirement in denying tax exemption.

Doesn’t giving churches a tax exemption violate the separation of church and state?

The concept of the separation of church and state is often misunderstood. “Church-state separation is not meant to create a religion-free civil society or public sphere,” says law professor Richard W. Garnett. “Instead, its purpose is to safeguard our fundamental right to religious freedom, by limiting the regulatory powers of government and by distinguishing between political and religious institutions.”

As noted above, the First Amendment to the U.S. Constitution mandates governmental neutrality. Churches and other religious organizations cannot be denied the same benefits as other organizations simply because they are religious.

In fact, the exemption prevents an undue and unnecessary entanglement between religion and the state. For example, as Tobin Grant observes, for the purposes of taxation the government may audit organizations, has rules about what counts as legitimate business expenses, and regulates how businesses perform their accounting. “To do this for churches means that the government would define what is and is not legitimate and then act to ensure compliance,” says Grant. “This raises a constitutional issue as Congress cannot make laws that affect the free exercise of religion.”

Most importantly, tax exemption for churches promotes religious liberty. “Governments do not refrain from taxing religious institutions merely because it is politically convenient or socially acceptable to support them,” adds Garnett. “They do and should continue to refrain from taxing churches because their power over them is limited, because ‘church’ and ‘state’ are distinct and because religious freedom is fundamentally important.”

“Tax exemption for churches is not a ‘reward,’ but a recognition that the power to tax is the power to destroy," said ERLC President Russell Moore. “And, indeed, with these comments Congressman O'Rourke threatens to destroy every church, synagogue or other religious institution that does not adopt his viewpoint on sexual ethics over and against their own traditions and authoritative texts. That is not the American way.”

Article 12: The Future of AI

We affirm that AI will continue to be developed in ways that we cannot currently imagine or understand, including AI that will far surpass many human abilities. God alone has the power to create life, and no future advancements in AI will usurp Him as the Creator of life. The church has a unique role in proclaiming human dignity for all and calling for the humane use of AI in all aspects of society.

We deny that AI will make us more or less human, or that AI will ever obtain a coequal level of worth, dignity, or value to image-bearers. Future advancements in AI will not ultimately fulfill our longings for a perfect world. While we are not able to comprehend or know the future, we do not fear what is to come because we know that God is omniscient and that nothing we create will be able to thwart His redemptive plan for creation or to supplant humanity as His image-bearers.

Genesis 1; Isaiah 42:8; Romans 1:20-21; 5:2; Ephesians 1:4-6; 2 Timothy 1:7-9; Revelation 5:9-10

Article 11: Public Policy

We affirm that the fundamental purposes of government are to protect human beings from harm, punish those who do evil, uphold civil liberties, and to commend those who do good. The public has a role in shaping and crafting policies concerning the use of AI in society, and these decisions should not be left to those who develop these technologies or to governments to set norms.

We deny that AI should be used by governments, corporations, or any entity to infringe upon God-given human rights. AI, even in a highly advanced state, should never be delegated the governing authority that has been granted by an all-sovereign God to human beings alone. 

Romans 13:1-7; Acts 10:35; 1 Peter 2:13-14

Article 10: War

We affirm that the use of AI in warfare should be governed by love of neighbor and the principles of just war. The use of AI may mitigate the loss of human life, provide greater protection of non-combatants, and inform better policymaking. Any lethal action conducted or substantially enabled by AI must employ 5 human oversight or review. All defense-related AI applications, such as underlying data and decision-making processes, must be subject to continual review by legitimate authorities. When these systems are deployed, human agents bear full moral responsibility for any actions taken by the system.

We deny that human agency or moral culpability in war can be delegated to AI. No nation or group has the right to use AI to carry out genocide, terrorism, torture, or other war crimes.

Genesis 4:10; Isaiah 1:16-17; Psalm 37:28; Matthew 5:44; 22:37-39; Romans 13:4

Article 9: Security

We affirm that AI has legitimate applications in policing, intelligence, surveillance, investigation, and other uses supporting the government’s responsibility to respect human rights, to protect and preserve human life, and to pursue justice in a flourishing society.

We deny that AI should be employed for safety and security applications in ways that seek to dehumanize, depersonalize, or harm our fellow human beings. We condemn the use of AI to suppress free expression or other basic human rights granted by God to all human beings.

Romans 13:1-7; 1 Peter 2:13-14

Article 8: Data & Privacy

We affirm that privacy and personal property are intertwined individual rights and choices that should not be violated by governments, corporations, nation-states, and other groups, even in the pursuit of the common good. While God knows all things, it is neither wise nor obligatory to have every detail of one’s life open to society.

We deny the manipulative and coercive uses of data and AI in ways that are inconsistent with the love of God and love of neighbor. Data collection practices should conform to ethical guidelines that uphold the dignity of all people. We further deny that consent, even informed consent, although requisite, is the only necessary ethical standard for the collection, manipulation, or exploitation of personal data—individually or in the aggregate. AI should not be employed in ways that distort truth through the use of generative applications. Data should not be mishandled, misused, or abused for sinful purposes to reinforce bias, strengthen the powerful, or demean the weak.

Exodus 20:15, Psalm 147:5; Isaiah 40:13-14; Matthew 10:16 Galatians 6:2; Hebrews 4:12-13; 1 John 1:7 

Article 7: Work

We affirm that work is part of God’s plan for human beings participating in the cultivation and stewardship of creation. The divine pattern is one of labor and rest in healthy proportion to each other. Our view of work should not be confined to commercial activity; it must also include the many ways that human beings serve each other through their efforts. AI can be used in ways that aid our work or allow us to make fuller use of our gifts. The church has a Spirit-empowered responsibility to help care for those who lose jobs and to encourage individuals, communities, employers, and governments to find ways to invest in the development of human beings and continue making vocational contributions to our lives together.

We deny that human worth and dignity is reducible to an individual’s economic contributions to society alone. Humanity should not use AI and other technological innovations as a reason to move toward lives of pure leisure even if greater social wealth creates such possibilities.

Genesis 1:27; 2:5; 2:15; Isaiah 65:21-24; Romans 12:6-8; Ephesians 4:11-16

Article 6: Sexuality

We affirm the goodness of God’s design for human sexuality which prescribes the sexual union to be an exclusive relationship between a man and a woman in the lifelong covenant of marriage.

We deny that the pursuit of sexual pleasure is a justification for the development or use of AI, and we condemn the objectification of humans that results from employing AI for sexual purposes. AI should not intrude upon or substitute for the biblical expression of sexuality between a husband and wife according to God’s design for human marriage.

Genesis 1:26-29; 2:18-25; Matthew 5:27-30; 1 Thess 4:3-4

Article 5: Bias

We affirm that, as a tool created by humans, AI will be inherently subject to bias and that these biases must be accounted for, minimized, or removed through continual human oversight and discretion. AI should be designed and used in such ways that treat all human beings as having equal worth and dignity. AI should be utilized as a tool to identify and eliminate bias inherent in human decision-making.

We deny that AI should be designed or used in ways that violate the fundamental principle of human dignity for all people. Neither should AI be used in ways that reinforce or further any ideology or agenda, seeking to subjugate human autonomy under the power of the state.

Micah 6:8; John 13:34; Galatians 3:28-29; 5:13-14; Philippians 2:3-4; Romans 12:10

Article 4: Medicine

We affirm that AI-related advances in medical technologies are expressions of God’s common grace through and for people created in His image and that these advances will increase our capacity to provide enhanced medical diagnostics and therapeutic interventions as we seek to care for all people. These advances should be guided by basic principles of medical ethics, including beneficence, non-maleficence, autonomy, and justice, which are all consistent with the biblical principle of loving our neighbor.

We deny that death and disease—effects of the Fall—can ultimately be eradicated apart from Jesus Christ. Utilitarian applications regarding healthcare distribution should not override the dignity of human life. Fur- 3 thermore, we reject the materialist and consequentialist worldview that understands medical applications of AI as a means of improving, changing, or completing human beings.

Matthew 5:45; John 11:25-26; 1 Corinthians 15:55-57; Galatians 6:2; Philippians 2:4

Article 3: Relationship of AI & Humanity

We affirm the use of AI to inform and aid human reasoning and moral decision-making because it is a tool that excels at processing data and making determinations, which often mimics or exceeds human ability. While AI excels in data-based computation, technology is incapable of possessing the capacity for moral agency or responsibility.

We deny that humans can or should cede our moral accountability or responsibilities to any form of AI that will ever be created. Only humanity will be judged by God on the basis of our actions and that of the tools we create. While technology can be created with a moral use in view, it is not a moral agent. Humans alone bear the responsibility for moral decision making.

Romans 2:6-8; Galatians 5:19-21; 2 Peter 1:5-8; 1 John 2:1

Article 2: AI as Technology

We affirm that the development of AI is a demonstration of the unique creative abilities of human beings. When AI is employed in accordance with God’s moral will, it is an example of man’s obedience to the divine command to steward creation and to honor Him. We believe in innovation for the glory of God, the sake of human flourishing, and the love of neighbor. While we acknowledge the reality of the Fall and its consequences on human nature and human innovation, technology can be used in society to uphold human dignity. As a part of our God-given creative nature, human beings should develop and harness technology in ways that lead to greater flourishing and the alleviation of human suffering.

We deny that the use of AI is morally neutral. It is not worthy of man’s hope, worship, or love. Since the Lord Jesus alone can atone for sin and reconcile humanity to its Creator, technology such as AI cannot fulfill humanity’s ultimate needs. We further deny the goodness and benefit of any application of AI that devalues or degrades the dignity and worth of another human being. 

Genesis 2:25; Exodus 20:3; 31:1-11; Proverbs 16:4; Matthew 22:37-40; Romans 3:23

Article 1: Image of God

We affirm that God created each human being in His image with intrinsic and equal worth, dignity, and moral agency, distinct from all creation, and that humanity’s creativity is intended to reflect God’s creative pattern.

We deny that any part of creation, including any form of technology, should ever be used to usurp or subvert the dominion and stewardship which has been entrusted solely to humanity by God; nor should technology be assigned a level of human identity, worth, dignity, or moral agency.

Genesis 1:26-28; 5:1-2; Isaiah 43:6-7; Jeremiah 1:5; John 13:34; Colossians 1:16; 3:10; Ephesians 4:24