***Disclaimer: I’m not a lawyer.  This post doesn’t constitute legal advice our counsel.  I’m simply sharing with you my past experience.  It is always advisable to consult a lawyer when working on legal paperwork for a church.

By far the most intimidating (and most expensive) part of the legal establishment of a church is filling out form 1023.  When its completed, you will have around 50 pages to the application and the cost is currently $850.  Many church planters ask if they really need to get it.  According to the IRS Tax Guide for Churches and Religious Organizations (p. 3), churches are automatically considered tax exempt and not required to apply if they meet certain requirements.  So no, the 501c3 is not 100% necessary for the legal establishment of a church.  The problem is the only organization that will recognize that a church is a 501c3 organization without a determination letter (this is the letter you get back from the IRS after submitting the application confirming you are a 501c3) is the IRS. Banks, state government offices, other organizations, etc. don’t recognize churches as 501c3 organizations without the determination letter.

So why get recognition?

1. Credibility.  It certifies that you meet the highest IRS standards.
2. Grants.  If you apply for grants for any community based ministries, you will likely be required to provide the determination letter.
3. Loans.  Some banks will give a better interest rate to 501c3 organizations.  You will not qualify without the determination letter.
4. It smooths the way:  States, the USPS, local businesses, etc. are more likely to rubber stamp a process if you have the 501c3.  For example, some business may donate equipment or supplies to 501c3 organizations.  But if you don’t have the exemption yet, they won’t be able to give to the church.
5. State Sales Tax Exemption.  Many states require a 501c3 determination letter as part of the application process for the state sales tax exemption.  If you are buying equipment for the church and spending a big chunk of money, it is nice to be able to get back the sales tax.  Let’s say you spend $20,000 on equipment and pay 6% sales tax.  You would save $1200 more than paying for the 501c3 application cost.

Here are a few general tips for filling out Form 1023.

• The key question the IRS wants to see answered is that you are a legitimate church.  Even if you are doing something non-traditional frame it in traditional language.  In other words, don’t say you are starting a missional community, say you are starting a church.  Don’t say you are having life groups, say you are having bible studies.  The IRS will not understand your modern language and it will result in them sending the application back with a list of questions.  Use churchy words like sacrament and worship.
• They want to know that you are holding public worship services.  Even if you aren’t in a rented facility yet and are meeting in homes, as long as they are open to the public you are fine.
• They want to know that teaching and preaching is going on.
• They want to know that the sacraments are being practiced.
• They want to know that there is a group gathered.  My general rule is not to submit the form until you have 20 – 30 people meeting together regularly.  Otherwise it will look to the IRS like you personally are trying to get exemption and they application will be rejected.

Submit this application as early as you can.  It generally takes 2 – 6 months to get approval.  Next week, we’ll dive into the details of the application.