Rules for Churches and 501(c)(3) Organizations

The November 8 general election has been a keen focus for many organizations trying to be heard above the cacophony of political voices. Although exempt organizations have a special place in the debates of ideas, they have to be careful in their activities. As discussed in this year’s Fall Tax School, there are several ways that §501(c)(3) organizations can incur taxes and possibly jeopardize their status under the Code. In this posting, we focus on three rules that churches and other §501(c)(3) organizations must follow to protect their status and avoid assessment of excise taxes.

Rule 1: They Can’t Participate in Political Campaigns

Loss of §501(c)(3) status can result from exempt organizations contributing to political campaigns or making public statements. Either activity can figuratively trip the wire that signals a violation of the last sentence of IRC §501(c)(3), which prohibits participation in political campaigns. On the other hand, §501(c)(3) organizations can participate in voter education activities, public forums, and get-out-the-vote drives without threatening their exempt status, provided that they do not tilt the scales in one direction or another. Candidates may be invited to speak at organizational events if opposing candidates have an equal opportunity to speak and no political fundraising occurs. But favoring one candidate over another can be taken as prohibited participation. Fortunately, the IRS has provided some guidance on the application of this rule.

Individual members of the organization can express their opinions if they indicate the opinion is their own and not the organization’s position. They should make no political comments within organizational activities, meetings, or publications.

Violations of this rule can result in an assessment of excise taxes. The excise tax imposed on charitable organizations is 10% of the political expenditures. An excise tax of 2.5% may also be imposed on the organization’s managers, up to $5,000 per expenditure.

Example. The Girvin Independent Church, an autonomous and hypothetical congregation in a southwestern state, is a staunch advocate for Governor Rob Smith in his 2022 reelection campaign. In a series of sermons during the campaign, Pastor Jim strongly advocated for Governor Rob. The church spent $5,000 to print a color brochure extolling Governor Rob’s virtuous character.

Given these circumstances, the IRS could impose excise taxes for prohibited involvement in a political campaign.

• 10% on the excess benefit to a disqualified person — Girvin Independent Church, $500 ($5,000 × 10%)
• 2.5% on the organizational manager — Pastor Jim, $125 ($5,000 × 2.5%)

If the excess benefit is not corrected, additional excise taxes may apply. The IRS could also seek to revoke the organization’s §501(c)(3) tax exemption.

Rule 2: They Can’t Influence Legislation or Lobby

Tax-exempt organizations are not permitted to influence legislation. Not only are they not allowed to contact legislators, but they cannot urge the public to contact them.

Section 501(c)(3) organizations that run afoul of this rule face penalties for excessive lobbying activities. They could even face possible revocation of their organization’s exempt status, resulting in all income becoming taxable. Further, the IRS may impose a 5% excise tax on the lobbying expenditures of the organization. A separate 5% excise tax may be imposed on organizational managers who knowingly authorize such expenditures.

This rule can seem very restrictive but the IRS has provided some clear guidance on activities that 501(c)(3) organizations can undertake.

Rule 3: No Individual Can Benefit From the Organization’s Net Earnings

No individual is permitted to profit or derive personal advantage from the activities of an exempt organization. An insider might receive a personal advantage if they receive unreasonable compensation. Transfer of property for less than fair market value could also be considered a prohibited personal advantage. At the organizational level, failure to comply can result in the loss of tax-exempt status. The individual involved may also be subject to excise taxes, as discussed earlier.

The Johnson Amendment and the 2017 Executive Order

The involvement of churches in politics has been a challenging issue for a long time. In 1954, Texas Senator Lyndon Johnson introduced tax legislation prohibiting all §501(c)(3) organizations, including churches, from promoting candidates for office. Popularly known as the Johnson Amendment, the language has survived for almost 70 years at the end of this paragraph c:

“which does not participate in, or intervene (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”

This requirement is the price §501(c)(3) organizations pay for the ability to receive tax-deductible contributions from their donors.

Around the 2016 elections, there was some discussion about eliminating this provision. This discussion resulted in Executive Order 13798, signed by the President on May 4, 2017, which ordered executive departments and agencies to “respect and protect” the freedom of religious and political speech. It did not suspend the Johnson Amendment, nor could it have overridden an act of Congress. Consequently, the language in IRC §501(c)(3) still prohibits the active support of a candidate for public office by a church or other §501(c)(3) organization.

Conclusion

Churches and exempt organizations are essential to the fabric of this nation and the principles underlying it. However, various laws circumscribe their activities, and as a result, §501(c)(3) organizations must be careful in how they communicate information about elections and initiatives on ballots. Partisan efforts are left to political organizations under IRC §527.
Exempt organizations, including both charitable and political organizations, are covered in this year’s Fall Tax School. If you haven’t already, be sure to sign up for Fall Tax School.
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Sources:
IRC §§501, 527, 4912(a), 4912(b), 4912(c)(2), and 4955.
2022 University of Illinois Federal Tax Workbook

By John W. Richmann, EA, MBA
Tax Materials Specialist, U of I Tax School