Maintaining Your Tax Exempt Status

Although churches are exempt from paying taxes under the IRS code 501(c)3 provision for associations "organized and operated exclusively for exempt purposes," congregations are not exempt from the requirement to file any number of tax-related forms in order to document and continue that tax-exempt status. Below are examples of the sorts of forms a church might expect to file in the course of a given fiscal year. Please be aware that (the enforcement of) some requirements may vary from jurisdiction to jurisdiction, so these examples should not be taken as an exhaustive list.  

Please be aware that neither our individual parishes nor the diocese itself is a 501(c)3 organization. Rather, we enjoy a grandfathered status under the 501(c)3 status of the Protestant Episcopal Church in the USA. Parishes requiring formal documentation of this (as required, for example, by some grant applications) should contact the diocesan office for documentation of the status of the Episcopal Church and a letter explaining this somewhat complicated relationship.

County

Your County Assessor is primarily concerned with Property Taxes on land, buildings and "business tangible property." Even though churches are exempt from taxes, they are not exempt from fees for failing to properly account for their property. Such fees can mount up, so attention to detail is a valuable investment of time.

For land and buildings:

  • Make certain your faith community has filed IN 136 (Application for Property Tax Exemption) for each building and lot.
  • Each year, your County assessor should send you a property assessment for each lot and its "improvements." Make sure that each lot is accounted for and that the taxes due at $0. Most counties also make property assessments available through an online database.
  • Some assessors are more strict than others about the requirement that property not only be be "owned" but also "occupied and utilized" for exempt purposes, so be careful to maintain up-to-date documentation, including plans in progress for using currently vacant property.
  • Renting church buildings (especially rectories) is always fraught with difficulty, not just because it veers towards business activity and consequent loss of property tax exemption, but also because tenants are always a source of frustration. Just don’t do it. Additionally, parishes having unrelated business income of over $1,000 should file Form IT - 20NP with the State of Indiana annually.

For "business tangible property" such as vestments, musical instruments and office equipment:

  • File IN 103-Short (Business Tangible Personal Property Return) annually
  • and (except for taxpayers with less than $20,000 cost to report within the county,) IN 104 (Business Tangible Personal Property Return) annually.

 

State

The Indiana Department of Revenue is primarily concerned with Income, Sales and Payroll Taxes. For the most part, filing will require documentation only, but in some cases a church will, in fact, owe taxes. Even where churches are exempt from taxes, however, they are not exempt from fees for failing to properly account for their income, sales and payroll. Such fees can mount up, so attention to detail is a valuable investment of time.

Income:

  • All parishes should be registered as non-profit corporations in the State of Indiana. If your parish is not registered, please contact the diocesan office for assistance.
  • Each corporation must file an annual business entity report with the Secretary of State and report significant changes to the formal structure of the church as a corporation (change of address, officers, etc). Some parishes may have foundations that are separately registered corporations requiring separate reports.
  • Form NP-20 simply gathers basic contact information and a mission statement on an annual basis. No fee is involved.
  • Parishes having unrelated business income—income from a trade or business activity regularly carried on by the nonprofit organization that is not substantially related to its exempt purpose—of over $1,000 should file Form IT - 20NP with the State of Indiana annually.

Sales

  • Once your parish is registered as a non-profit corporation with the state, you can apply for a sales tax exemption certificate which you should keep on hand in your parish office for use when making major purchases.

Payroll

  • Payroll Taxes are complicated. For Lay employees, file WH-1 (Indiana Withholding Tax Voucher)—which is required for any business that is withholding taxes from its employees —and WH-3 (Annual Withholding Tax Form) at intax.gov.
  • Taxes for clergy are even more complicated. Consult the CPG Tax Resources page for assistance in filing clergy payroll taxes.

Federal

The Internal Revenue Service is primarily concerned with Income and Payroll Taxes. As with the State, filing with the Federal Government usually will require documentation only, but in some cases a church will, in fact, owe taxes. Even where churches are exempt from taxes, however, they are not exempt from fees for failing to properly account for their income, sales and payroll. Such fees can mount up, so attention to detail is a valuable investment of time.

Income:

  • Parishes having unrelated business income—income from a trade or business activity regularly carried on by the nonprofit organization that is not substantially related to its exempt purpose—of over $1,000 must file Form 990-T. An organization must pay estimated tax if it expects its tax for the year to be $500 or more.

Payroll

  • All parishes should have a Federal Employer Identification Number (FEIN or simply EIN). Like a social security number, an FEIN connects the documentation of the parish as an employer with the taxes of its employees. If your parish does not have an FEIN, please contact the diocesan office for assistance.
  • Consult the CPG Tax Resources page for assistance in filing clergy payroll taxes.
  • Be sure to follow all rules and deadlines for Forms 941, W2 & W3, 1099MISC and 1096 for federal taxes. Filing can be done at www.eftps.gov and www.ssa.gov/bos.