Nonprofit Hospitals

About 15 states exempt nonprofit hospitals from registration.  As a general matter, the exemption will apply to a nonprofit, charitable hospital regardless of where the hospital is licensed.  However, a number of states limit the hospital exemption to only those hospitals licensed within the state.  Additionally, in some states, the exemption is not available to hospitals that engage the services of a professional fundraiser.  Hospital foundations are exempt in only three states. 

Educational Institutions

About 33 states exempt educational institutions from registration.  Many offer a fairly broad scope of exemption that would apply to most colleges or universities accredited by a recognized regional or national accrediting body.  However, a number of states limit the exemption to those educational institutions which (a) are operating within the state only; (b) confine their solicitations to alumni, faculty, trustees, or the student membership and their families (meaning that universities that solicit contributions from foundations or corporations to support academic research, athletics, or other programs would not qualify for the exemption); or (c) qualify as a religious organization or are controlled or supervised by a religious organization.   

Religious Organizations

Most states exempt or exclude religious organizations from their charitable solicitation registration and reporting requirements. The scope of that exemption varies widely among states, both in how religious organizations are defined and in how those definitions are interpreted and applied. For some, the religious exemption provisions are broadly constructed, and exempt any “duly organized religious corporation, religious institution or religious society,” leaving the organization to determine if it falls within the exemption.  Other provisions are more narrowly drafted or applied, exempting only those organizations that are not required to file Form 990 with the IRS. These primarily include churches,¹ their integrated auxiliaries,² and ecclesiastical or denominational organizations.  Additionally, the exemption may be further limited to religious organizations that do not use the services of a professional fundraiser.  

Generally religious organizations that are required to file Form 990 with the IRS, will be exempt in some, but not all, states.  Many of those describe their mission as both religious and charitable, as together these constitute an expression of their religious faith and values.  Charitable services may include the provision of food, shelter, education, and medical support to vulnerable populations.  Oftentimes, religious organizations incorporate prayer and religious instruction into their programmatic work and require their employees to agree to an organizational statement of faith.  

Confirming Exemption from Registration

While a few states have a formal exemption review and approval process which includes submission of exemption forms and supporting documentation, a number of states have no formal process.  For these states, organizations may simply submit a letter advising the state of its own determination of exemption.  

A number of other states will consider hospitals, educational institutions, and religious organizations exempt based on their own determination, and may or may not require submission of a confirmation letter. It may be prudent, however, for organizations to submit a letter and have it noted in the state’s files even when not required. Doing so may help facilitate discussion with any professional fundraiser, fundraising consultant, or commercial co-venturer engaged by the organization, which must ensure that their charity clients or partners are properly registered or otherwise exempt from registering and may even insist upon receiving evidence of such registration or exemption in order to protect their own compliance obligations.  Further, funders and even individual donors may base contribution decisions on an organization’s compliance with registration requirements.  

Implications of New California Law Governing Charitable Fundraising Platforms on Hospitals, Educational Institutions, and Religious Organizations

We recently became aware of a number of nonprofit hospitals that were blocked from receiving donations through Facebook and other online fundraising platforms as a result of the platform’s implementation of a new “good standing” requirement which is part of California’s recently enacted law governing charitable solicitation, known as Assembly Bill 488 (AB 488).  Online fundraising platforms must block organizations that have a delinquent status with certain state and federal regulatory agencies from receiving donations through their platform.  The issue occurred even though the blocked hospitals met the statutory requirements for exemption from registration in California. A charitable organization’s failure to be in good standing in California has implications far beyond that state because platforms will generally block all online donations made to delinquent organizations from donors located anywhere, not just donations made by California residents.  

To learn more about California’s new “good standing” requirement, how it affects exempt organizations, and steps your organization can take to avoid or resolve a “good standing” issue, read Has Your Organization Been Blocked by Charitable Fundraising Platforms?

1 The term “church” includes churches, temples, mosques, and other houses of worship.

2 See https://www.irs.gov/charities-non-profits/churches-religious-organizations/integrated-auxiliary-of-a-church-defined.

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Due to Constitutional concerns the term “church” may be found, but is not defined, in the Internal Revenue Code (IRC). To determine whether a religious organization is a church for federal tax purposes, the IRS reviews a set of fourteen (14) characteristics, together with any other relevant facts and circumstances, including whether the organization has an established place of worship, a congregation, and regular religious services.[2]  No single characteristic is controlling nor is there a particular number of characteristics that will guarantee that the organization is a “true” church.

The subjective nature of the IRS’s “facts and circumstances” test for distinguishing churches from other religious organizations makes it challenging to draw a definitive line between churches and religious organizations for federal tax purposes. That said, religious organizations that are not churches generally are not places where a congregation regularly worships and attends religious services. Instead, they may be non-denominational ministries organized to study or advance religion or organizations with a mission that stems from a religious text or sincerely held and deeply-rooted religious belief.

The following is a discussion of several federal and state laws that provide different treatment to churches when compared to the broader category of religious or faith-based organizations.

Recognition of Federal Tax-Exempt Status

In order to be exempt from federal income tax, religious organizations and churches must be organized and operated exclusively for religious purposes and comply with the IRC’s prohibition on private inurement and political campaign activity as well as its limitation on lobbying activities.

Religious organizations must submit an application for recognition of exemption (Form 1023) to the IRS.

Churches, on the other hand, are automatically recognized as exempt and are not required to submit an application to the IRS. Even so, some churches choose to apply since an IRS determination letter can make it easier to apply for exemptions from state taxes or registration requirements and provide assurance to donors that contributions to the church are tax-deductible.

Lobbying and the 501(h) Election

An organization, including a religious organization or a church, may not qualify for exemption from federal income tax if a substantial part of its activities is attempting to influence legislation (i.e., lobbying).  Generally, whether an organization’s attempts to influence legislation constitute a substantial part of its activities (and therefore jeopardizes its tax-exempt status) is determined by a “facts and circumstances” test, by which the IRS considers a number of factors including the time and expenditures devoted to lobbying (“the substantial part test”).

Religious organizations have the option to elect the “expenditure test” rather than the substantial part test. Under the expenditure test, the extent of a religious organization’s lobbying activity won’t jeopardize its tax-exempt status, provided its expenditures, related to the activity, do not normally exceed an amount specified in IRC Section 4911. Ultimately, the expenditure test provides more clarity regarding how much lobbying an organization is permitted to engage in before jeopardizing its tax-exempt status. Churches, by contrast, are not eligible to elect the expenditure test. 

Annual Information Return

Religious organizations must file an annual information return (Form 990, Form 990-EZ or Form 990-N e-Postcard) with the IRS providing information to the IRS and to the public about the organization’s finances and activities for the year.[3] Churches are exempt from this requirement[4] though some churches choose to file an annual information return in order to increase transparency.

Federal and State Unemployment Tax

Churches and religious organizations are not required to pay federal unemployment taxes because services provided to 501(c)(3) organizations are generally exempt from the definition of “employment” under the Federal Unemployment Tax Act.[5] States collect unemployment insurance tax under their own unemployment tax acts and the requirements to file vary by state. Some religious organizations may be required to pay state unemployment tax, whereas, churches are generally exempt from paying state unemployment tax. Some churches voluntarily elect to pay such taxes so that employees terminated without good cause will be eligible to collect unemployment benefits.

Social Security & Medicare Taxes

Churches and religious organizations are generally required to collect, pay and report employment taxes under the Federal Insurance Compensation Act (FICA) for their employees. A church that opposes payment of Social Security and Medicare taxes for religious reasons can elect exemption from the payment of the employer’s share of FICA taxes by filing Form 8274. The church must file Form 8274 before the first date on which the church is required to file its first quarterly employment tax return (Form 941). If the church so elects, employees will, like ministers, be responsible to pay Social Security and Medicare taxes on their salary under the Self-Employment Contributions Act (SECA).

Ministers[6] are subject to unique rules when it comes to employment taxes. Although a minister is considered an employee under the common law rules, payments for services as a minister are considered income from self-employment.[7] Therefore, a minister, unless exempt, pays social security and Medicare taxes on his salary and housing allowance under SECA and is not subject to FICA taxes or income tax withholding. SECA employment tax payments are typically made in quarterly estimates, using coupons or vouchers. Churches are not permitted to pay the SECA tax for their ministers, but many churches assist ministers by providing them a “Social Security Allowance” of at least 50% of the SECA tax. This allowance is often approximately equal to the amount of FICA tax a church would pay if the minister were treated as an employee for purposes of employment taxes.

IRS Audits

In general, the IRS is authorized to conduct examinations of tax-exempt organizations, including religious organizations, in order to ascertain whether they are in compliance with all applicable requirements of the IRC. However, the authority of the IRS to audit churches is restricted. It is important to note that these restrictions do not apply to integrated auxiliaries of churches. The IRS may only initiate a church examination if an appropriate high-level Treasury Department official reasonably believes, based on a written statement of the facts and circumstances, that the church, (1) may not qualify for federal tax-exemption, or (2), may not be paying tax on an unrelated business or other taxable activity. This restriction does not apply to all inquiries or examinations. For example, the IRS can still make a routine request for information. In addition, restrictions on church inquiries do not apply to criminal investigations or investigations of the tax liability of a person connected with the church (such as a donor or minister).

Affordable Care Act

Generally, religious organizations and churches are subject to the provisions of the Affordable Care Act. However, churches and religious organizations with a sincere religious objection to establishing or maintaining a health insurance plan that provides coverage for contraceptive services are exempt from the Affordable Care Act’s mandate that employers provide access to health insurance to employees that covers women’s preventative services.[8] 

State Taxes and Registration Requirements

Generally, churches are subject to the same rules for state property tax and sales and use tax as religious organizations. Many states exempt churches and religious organizations from payment of property tax on land owned by the organization and used for religious purposes. Whether this exemption is available and the requirements for eligibility vary by a state. For example, in New York real property owned by a nonprofit corporation organized or conducted exclusively for religious purposes and used exclusively for carrying out the organization’s religious purpose is wholly exempt from taxation and, for certain purposes, from special ad valorem taxes.[9]

In addition, some states have broad sales and use tax exemptions applicable to churches and religious organizations. For example, in New York, organizations established and operated exclusively for religious purposes are exempt from sales and use tax.[10] Other states, however, only exempt certain purchases or sales made by churches or religious organizations. For example, Mississippi requires churches and religious organizations to collect and pay tax on purchases and sales except on purchases of electricity, gases, other fuels and potable water used on property primarily used for religious or educational purposes.[11]

Finally, some states have a broad exemption from the requirement to register to solicit charitable contributions for churches and religious organizations while others only exempt churches and their integrated auxiliaries. For example, New York exempts all corporations organized under the Religious Corporations Law, other religious organizations, and charities and organizations operated, supervised, or controlled by or in connection with a religious organization.[12] By contrast, West Virginia exempts only churches, synagogues, associations or conventions of churches, religious orders or religious organizations that are an integral part of a church which qualify as tax exempt under IRC 501(c)(3) and are exempt from filing an annual information return with the IRS.[13]

[1] “Church” includes similar institutions of all faiths, including temples, mosques, synagogues, etc. Also, unless otherwise stated, for purposes of this article, “church” includes “integrated auxiliaries” and a “conventions or associations of churches.” An “integrated auxiliary” of a church is a public charity affiliated with a church and that receives financial support primarily from internal church sources as opposed to public or government sources. Common examples are men’s and women’s organizations, seminaries, mission societies and youth groups.

[2] The full list of characteristics includes (1) a distinct legal existence; (2) a recognized creed and form of worship; (3) a definite and distinct ecclesiastical government; (4) a formal code of doctrine and discipline; (5) a distinct religious history; (6) a membership not associated with any other church or denomination; (7) ordained ministers ministering to its congregation; (8) ordained ministers selected after completing prescribed studies; (9) a literature of its own; (10) established places of worship; (11) regular congregations; (12) regular religious services; (13) schools for the preparation of its ministers; (14) and schools for the religious instruction of the young. The organization must demonstrate that, on balance, it has the characteristics of a church. In making its determination, the IRS does not evaluate the content of a church’s professed beliefs as long as those beliefs are sincerely held and not illegal or against public policy.

[3] 26 U.S.C. 6033(a)(1).

[4] 26 U.S.C. 6033(a)(3)(A)(i).

[5] 26 U.S.C. 3306(c)(8).

[6] This term includes members of clergy of all religions and denominations (e.g., priests, rabbis, imams, etc.).

[7] 26 U.S.C. 1402(c), 3121(b)(8)

[8] 82 Fed. Reg. 47812 (2017). See also, Little Sisters of the Poor Saints Peter Saints Peter and Paul Home v. Pennsylvania, Doc. No. 19-431 (U.S. July 8, 2020) (court held the Departments of Health and Human Services, Labor, and the Treasury had the authority under the ACA to promulgate the religious and moral exemptions, and they promulgated those exemptions consistent with the manner required under the Administrative Procedure Act).

[9] RPTL §420-A.

[10] N.Y. Tax Law §1116(a)(4).

[11] Miss. Code Ann. §27-65-19(1)(a)(ii).

[12] N.Y. Executive Law §172-a(1).

[13] W. Va. Code, § 29-19-6(5).

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• Executive compensation and excess benefit transactions
• Clergy housing exclusion
• Churches, accountability, and donor engagement
• IRS advisory committee for religious organizations
• Independent accreditation and ECFA’s model
• Religious organization examinations and third-party oversight
• Examinations of church leaders
• Love offerings
• Public disclosure of highly sensitive information

Senator Grassley asked the Evangelical Council on Financial Accountability to convene the Commission following his three-year investigation of six high-profile Christian media ministries.  The Commission’s Panel of Religious Sector Representatives includes leaders from virtually every major faith group in America.  Commission Chairman Michael Batts stated that throughout the entire process of meetings, discussions, and presentations, there was an “extraordinarily high degree of agreement among those participating.”

The Commission concluded that additional legislation is not the solution to rectify current instances of financial misconduct. Rather, it suggests, self-regulation, coupled with effective administration of existing laws, increased education about the law, and increased donor engagement, can effectively address the concerns of misconduct raised by the regulatory community. The Commission rejected many of the ideas for additional or revised legislation raised by Senator Grassley’s staff as being more problematic than helpful. In support of this non-legislative approach, Commission Chairman Michael Batts writes, “We cannot allow the behavior of a few outliers in the religious and nonprofit sector to threaten the freedoms of those who are not the problem – those who are doing the good work.  The number of organizations that engage in egregious financial misconduct is miniscule in comparison to the sector as a whole.”

Senator Grassley issued a statement in response to the Report, thanking the Commission for its work, but noting that “[t]he report gives less attention to resolving some of the thornier questions, such as how to build accountability from entities that exploit vagueness in current laws and regulations for individual benefit rather than the greater good.”

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