What is the difference between 501(c)(3) and 508(c)(1)(A)?

I have been looking into options that churches have in maintaining a tax exempt status other than 501(c)(3). I read that a church can file under 508(c)(1)(A), but am not able to find any information about it on the IRS website. I am looking for something with less governmental control. 

     There is no exempt status for a church other than section 501(c)(3).  As pointed out in the answer to the original question, churches are exempt under section 501(c)(3).  Section 508 does not grant exempt status.  It merely says that organizations that qualify as churches under section 501(c)(3) don't have to file with the IRS to obtain that status.    —Don Kramer

Thank you for your service.

Most of us are not lawyers, and certainly not tax lawyers. While the text above talks about 501(c)(3) and 508(c)(1)(A) differences, it does not seem to clarify the situation. There are websites out there, and purported churches and ministries, which declare themselves as a 508(c)(1)(A) nonprofits, and enable others to become one as well. The legality of a 508 church claiming nonprofit status while not seeking a 501(c)(3) to obtain official status appears at best murky and at worst illegal or shady. Are donations to a 508(c)(1)(A) church legally recognized as tax-deductible by donors the same as they would be for a 501(c)(3) church? If yes, it seems there is also a condition that the 508(c)(1)(A) church fulfills all the requirements of a 501(c)(3) church organization, even if not apply for that status. Why form under a 501(c)(3) church exempt status if you get all the benefits and less headaches (filing requirements) with a 508(c)(1)(A) church organization?

     You have put your finger on one of the things that I believe those selling the idea of 508(c)(1)(A) churches generally fail to point out.  To qualify to use 508(c)(1)(A), you have to be meet the requirements of 501(c)(3), just as any other charity.   The entity must meet the IRS definition of a church, must be both organized and operated exclsively for religious purposes, there can be no private benefit or inurement to the insiders, it may not participate in election campaigns and it may not do more than an insubstantial amount of lobbying.  Section 508(c) removes the requirement to file to obtain exemption, but not the requirements to meet the definition of a church and function like every other 501(c)(3).  If the IRS investigates and finds that the organization does not meet the 501(c)(3) standards, it can deny the tax exempt status, including retroactive denial.

For a donor, contributions would ordinarily be deductible so long as the donor doesn't have reason to know that the recipient does not qualify under 501(c)(3). But an IRS auditor of a personal tax return might not readily grant a deduction to an organization that is not listed as a church with the IRS.  The auditor could ask the donor to prove that the organization qualifies as a church.  Since most taxpayers don't itemize the charitable contributions these days and since there aren't many audits of those who do, this may not be a serious problem, but the deduction would be more problematic than one to a reognized organization.    —Don Kramer

So I have done a ton of research and work in this area. Point blank, all churches/religious organizations are automatically tax exempt under the tax code 501(c)(3) without having to file a 1023. Even the IRS recognizes this on their website. Section 508(c)(1)(a) merely codifies the right of religious orgs/churches not to have to file a 1023 but still be tax exempt under 501(c)(3). It doesn't create any new type of entity as suggested by many. It merely codifies the right of churches to be automatically tax exempt, under 501(c)(3). As such, all religious orgs, once filed with the state of domicile, are 501(c)(3) tax exempt organizations. At that point, the only thing needed to do is to notify the IRS, per the EIN filing, that you are claiming to be a tax exempt religious organization. At that point, donors use the EIN to reference tax write offs. Many may ask, well how is it that Churches are automatically tax exempt under the Code? Well it's because the right of religious practitioners and churches to collect tax free donations and tithes is so closely married to the right to free exercise, that interjecting an executive branch agency like the IRS between religious practitioners/churches and their ability to collect tax free tithes and donations would constitute an impermissible prior restraint on First Amendment (free exercise) rights. In this country, the Courts are the arbiters of religious freedom, not the IRS, or any other executive governmental agency not specifically granted such authority, and per the Johnson Amendment to the tax code (i.e. 508(c)(1)(a)), the IRS has been robbed of any discretion over the tax exempt status of religious practitioners. Now it must be noted that the IRS's position, with which some federal circuits agree, that even though you don't have to file a 501(c)(3) application, they otherwise have to "comply with the provisions of 501(c)(3)." Exactly what is meant by this is not well defined. I always recommend that Churches put the correct 501(c)(3) language in their state filing (purpose, no political activity, distribution of assets, etc.) and also to have a good conflict of interest provision in their bylaws. In my view, that is, at the most, all that is needed to "otherwise comply with 501(c)(3)." As it relates to the way that the IRS determines whether an entity is "religious" or a "church," I don't think that could constitutionally be included in the "otherwise comply" analysis. The IRS's definition of religion or church is much different that the Court's definition. As such, to the extent that the IRS definition limits the definition, it is unconstitutional. Again, the right to collect tax free donations and tithes is commensurate with the right to free exercise. At the end of the day folks, if you are a Church or a religion, you always have the federal Religious Freedom and Restoration Act which states that the government has to show a "compelling interest" in order to substantially burden a sincere religious exercise (like collecting tax free tithes and donations). To the extent that the IRS, by and through its ultra strict religion analysis, substantially burdens a practitioners sincere religious (as defined by the Courts) exercise, then those claimants would be exempt from such requirements of the tax code (meaning you don't have to meet the ultra-strict) religion test as espoused by the IRS, and would be declared tax exempt by the Court. Moreover, such a claimant could personally sue any IRS agents involved, personally, for money damages, per the U.S. Supreme Court's decision in Tanzin. Lastly, and I don't have the citation here, I will supplement when I find if I can, there is a specific federal law on point which protects, to a large degree anyways, churches and religious orgs from IRS audit and/or inquiry. They are able to conduct them, but under this law, they have to undergo a very arduous procedure and the statute only leaves the authority to initiate these proceedings with only a handful of top IRS agents in the country. So always keep this in mind and always assert your rights, at all times. I hope this lengthy response helps someone. I'm an attorney who has been working with entheogen-based religious groups for over three years now so this has been something I've had to dig deep on. But if I could stress a few things it would be that churches/religious orgs are automatically tax exempt under 501(c)(3), 508(c)(1)(a) doesn't create any new type of entity, tax exempt status UNDER 501(c)(3) is a constitutional right for all religious orgs/churches, best practice is to include the proper 501(c)(3) provisions in formation docs and always include a conflict of interest provision in any bylaws, and there are strong federal statutes such as RFRA that protect religious practitioners from being substantially burdened. Much Love!!!!!

Thanks for this thoughtful and comprehensive discussion of the issues.  I fully agree that section 508(c)(1)(A) does not create a new type of entity and merely confirms that a 501(c)(3) "church" does not have to file for official recognition of its status from the IRS.

I would caution readers, however, from thinking this applies to a broad base of "religious organizations."  The statute says it applies only to "churches, their integrated auxiliaries and conventions or associations of churches," a set of entities that is substantially narrower than "religious organizations."  It clearly does not apply to faith-based social service organizations, for example, if they are not an integral part of the church religious structure.

The comment questions what type of 501(c)(3) restrictions will still be applied to churches.  The excess benefit tax provisions were enacted in large part because of the perception of excessive compensation of some of the "televangelists" of the 1970s and 1980s, so the IRS would have an interest in excessive compensation of church officials today as an excess benefit subject to excess benefit taxes.  It clearly takes the posiiton that churches may not engage in electioneering and has frequently revoked exempt status for churches who have supported or opposed candidates for office.  It would also seek to tax unrelated business taxable income if it knew a church was engaged in unrelated business activity.

The writer says he has been working with entheogen-based religious groups that have a constitutional right to church exemption.  The IRS has certainly disagreed with the classification for some churches that have based their religious practices on use of illegal drugs in their religious practices.  The Constitutional rights and protections under the Religious Freedom Restoration Act for such organizations may not be as clear as the writer suggests.  —Don Kramer

It seems to me the marketing of the 508(c)(1)(A) as a less restrictive status as a non-profit, specifically a church, is just that, "marketing" to allow someone to set up your FBO under that IRC section. Though, I have not found a method to register a nonprofit under IRC 508(c)(1)(A). Is it even possible?

There is no way to register under section 508(c)(1)(A).  As we have said, it is only a section that says a 501(c)(3) church does not have to register.  I agree that a lot of the literature is just marketing and not substantively correct.  —Don Kramer

Don Kramer is absolutely incorrect when he claims that a 508 is "OBLIGATED" to do anything. The difference between the 501 and the 508 is that when an organization incorporates under 501, they are "registering" their organization with the state and hence are under the jurisdiction of the state. When an organization is created under the FEDERAL 508 rule, they are strictly declaring that they are NOT under the rule of the state. What has not been told to us is that we do not have to submit our organizations to the authority of the State, that is by Federal Rule. And the 508 organization DOES NOT have to operate as a church. There is no mandate as to how the organization has to operate as the 508 is out of the jurisdiction of the State which is the agency that will attempt to mandate. And they can NOT deny a 508 tax exempt status. They can TRY, but legally, they have no authority. To answer the question posed initially, the donations given to a 508 organization are NOT considered tax deductible as the deductions come from the State side. The 508 is NOT under the jurisdiction of the state and hence would not be eligible to receive such deductions as a 501 would. Furthermore, when it comes to paying taxes, those mandelates are enforced by the state. What we are not told is the difference between the internal Revenue Service and the IRS. One of those organizations (IRS) is a state side organization. They can ONLY enforce mandates on organizations under their jurisdiction. An organization under 508 authority, is NOT to be mandated by a state organization.

We continue to get comments on the relationship between a 501(c)(3) “church” and the right of an organization to be considered a church for federal income tax exemption without having to file to seek recognition as a church from the Internal Revenue Service.  Many of the comments are based on what the commenter has or has not “been told” by various unidentified people who promote confusion in the field.  Much of what is reported to have “been told” to the commenter is either misunderstood or simply wrong.  The comment below is illustrative of the confusion so rampant in the community.  My reactions to the comment are interspersed in italics below.--Don Kramer

“Don Kramer is absolutely incorrect when he claims that a 508 is "OBLIGATED" to do anything."

DK: The Internal Revenue Code provides in section 501(c)(3) that an organization that meets the Internal Revenue Service definition of a “church” under section 501(c)(3) is not required to pay federal income tax.  The Tax Code also provides in section 508(c)(1)(A) that a church, unlike the vast majority of other charities, does not have to apply for recognition of that exempt status.  An organization claiming church status under 501(c)(3) is still required to follow the rules applicable to 501(c)(3) churches, such as not paying excessive compensation to their pastors and not intervening in political elections. Nothing in section 508 says the federal rules for 501(c)(3) organizations, other than the requirement to file for recognition of exemption, do not apply to a church.

“The difference between the 501 and the 508 is that when an organization incorporates under 501, they are "registering" their organization with the state and hence are under the jurisdiction of the state. When an organization is created under the FEDERAL 508 rule, they are strictly declaring that they are NOT under the rule of the state."

DK: An organization normally incorporates as a nonprofit or religious entity under the law of one of the 50 states or other jurisdictions like the District of Columbia that regulate corporate governance and other matters within their jurisdictions.  The organization may claim to be described in section 501(c)(3) of the federal law or that it will follow the rules for 501(c)(3) organizations, but it does not incorporate “under” section 501 of the federal law.  The organization does, however, by such incorporation submit to regulation by the state (not to the federal government).  An organization cannot be “created” under section 508 of the Tax Code because section 508 merely says that it does not have to register with the IRS to qualify as a church exempt under 501(c)(3).   Federal tax status is totally separate from state law regulation and claiming federal tax exemption does not normally affect state regulation on state law issues.

“What has not been told to us is that we do not have to submit our organizations to the authority of the State, that is by Federal Rule."

DK: I am not sure whether State, with a capital S, refers to government generally, refers merely to one of the 50 states and other jurisdictions that regulate governance and other matters within their jurisdictions, or is simply imprecise language that deprives it of actual meaning.  I am also not sure how the double negative applies here.  If they have not been told that they do not have to submit to the authority of the State, does that mean that they were told they do have to submit to state authority?  If that is what is intended by the statement and state refers to one of the separate jurisdictions, I can agree with it.

“And the 508 organization DOES NOT have to operate as a church. There is no mandate as to how the organization has to operate as the 508 is out of the jurisdiction of the State which is the agency that will attempt to mandate. And they can NOT deny a 508 tax exempt status. They can TRY, but legally, they have no authority."

DK: It is true that a state cannot deny federal tax-exempt status, but, as we have already explained, section 508 applies only to permit organizations to claim to be a church under section 501(c)(3) of the federal law without filing a separate application for recognition of that exemption.

“To answer the question posed initially, the donations given to a 508 organization are NOT considered tax deductible as the deductions come from the State side. The 508 is NOT under the jurisdiction of the state and hence would not be eligible to receive such deductions as a 501 would."

DK: It appears as though this part of the comment is talking about deductibility of donations to the organization under state income tax law.   State definitions of churches eligible to receive contributions that are deductible on state income taxes may be different from the federal definition.  Gifts to 501(c)(3) churches, including gifts to those that did not apply for recognition of exemption because of 508(c)(1)(A), are deductible under the federal tax rules.  It is true that 508 is not under the jurisdiction of the state, but it seems highly unlikely that an ordinary 501(c)(3) would be able to receive deductible donations under state law while a 501(c)(3) church that did not file for recognition under 508(c)(1)(A) would not be able to receive such deductible donations.

“Furthermore, when it comes to paying taxes, those mandelates (sic) are enforced by the state."

DK: The mandates for state taxes are enforced by the states; the mandates for federal taxes are enforced by the federal government.  They both have mandates that they can enforce.

“What we are not told is the difference between the internal Revenue Service and the IRS."

DK: The difference between the Internal Revenue Service and the IRS is that IRS is an acronym for Internal Revenue Service.  There is no difference in their authority.

“One of those organizations (IRS) is a state side organization. They can ONLY enforce mandates on organizations under their jurisdiction. An organization under 508 authority, is NOT to be mandated by a state organization.  —D.L."

DK: The IRS is a “state” organization only in the sense that it is a governmental organization.  It can enforce the federal tax law that applies to 501(c)(3) churches whether or not they have chosen to use section 508 to forgo applying for recognition of that exempt status. A state has separate authority to enforce state laws and regulations.

If you are reporting accurately what you have been told, you have been seriously misinformed.

From the Church Law Center on the subject of Section 501(c)(3) Churches vs. Section 508(c)(1)(A) Churches.

There is an idea gaining popularity in the church world today that churches should claim tax exempt status under Internal Revenue Code section 508(c)(1)(A) rather than section 501(c)(3) for greater protection of religious liberties and increased protection from IRS scrutiny. Plainly put, this is a misunderstanding and misinterpretation of the Internal Revenue Code.

The Internal Revenue Code specifies a list of tax-exempt organizations in Section 501(c). Corporations that are operated exclusively for religious purposes fall under Section 501(c)(3). This is not an optional classification. There is no method or mechanism to change which section of the code the IRS has designated for exclusively religious corporations.

Since 1969, nonprofit organizations seeking recognition of tax-exempt status have been required to notify the IRS of their plans and activities. This is done by submitting the IRS’ form 1023. Additionally, most nonprofits must file annual disclosures of their revenues and expenses.

Some organizations, including churches, their auxiliaries, some church-operated schools, and conventions or associations of churches are exempt from filing both the application for recognition of tax-exempt status as well as the annual disclosures. These exemptions are granted in Section 508(c)(1)(A) and Section 6033(a)(3)(A) respectively. These exemptions are granted to churches because they are a particular type of 501(c)(3) organization, not as an alternative classification to being a 501(c)(3) organization.

What Does Section 508(c)(1)(A) actually say?
Section 508 discusses special rules that apply to organizations recognized as tax-exempt under section 501(c)(3). It states that new organizations must notify the IRS of their intention to apply for recognition of tax-exempt status under section 501(c)(3) and that if they do not specifically disclaim being a private foundation, the Service will presume them to be a private foundation.

Section 508(c)(1)(A) is simply a list of mandatory exceptions to those special rules. It states that churches, their integrated auxiliaries, and conventions or associations of churches are exempt from filing the notice with the Service, meaning that churches and their integrated auxiliaries, etc. are not required to submit form 1023 in order to be recognized as tax exempt. They are exempt already.

Further Exemptions for Churches
The IRS grants an additional exemption to churches in Section 6033(a)(3)(A). This section grants churches, their integrated auxiliaries, and conventions or associations of churches, an exemption from filing an annual informational tax return that discloses gross income, receipts, and disbursements. This exemption is one of the biggest incentives for churches and their integrated auxiliaries, etc., as it provides a great degree of financial autonomy from the federal government.

Additional Benefits of 508(c)(1)(A)?
Those who promote the idea that churches should claim recognition of tax exemption under Section 508 assert that this classification grants churches additional benefits and protections that they would otherwise not receive as 501(c)(3) organizations. However, the desirable protections churches seek – tax deductible donations, religious liberties, financial autonomy from government oversight – are all protections that are granted to churches already. There are no additional benefits of Section 508(c)(1)(A) apart from the benefit of not being required to file the application for recognition of tax-exempt status.

Thanks so much for the information. I was trying to help a local group that offers community service In small town America.