In light of the Church’s recent policy statement banning some Church authorities from endorsing candidates, and the speculation that the Church’s political neutrality derives from its desire to stay tax-exempt,[fn1] I thought I’d present a brief primer on the tax exemption.[fn2]
The Revenue Act of 1894 probably represents the birth of the modern federal income tax. An inauspicious birth, to be sure–it was struck down as unconstitutional in 1895–but the birth, nonetheless.
True, it was enacted 19 years before the 16th Amendment permitted direct taxation (whatever that is), but it set the stage for the income tax to come. Including, it turns out, in the world of exempting public charities from tax. It provided that the income tax would not apply to “corporations, companies, or associations organized and conducted solely for charitable, religious, or educational purposes.” [fn3] Although the list of entities that aren’t taxed has expanded (among other things, the exemption now includes groups that foster amateur sports competition–read the NCAA–and that are organized to prevent cruelty to children or animals), the current law reads almost identically to the 1894 version.
Why do we exempt some groups, including religious groups, from tax? Theories range from the historical to the idea that they relieve the government from providing some services to the idea that this subsidy for public charities permits tax payers to directly control some portion of government spending to the idea that they (specifically, in this case, religions) are co-sovereigns and therefore not subject to the government’s taxing jurisdiction. The tax exemption (for all tax-exempts, not just churches) is controversial. But it doesn’t appear to be going away.
Most public charities[fn4] have to file a (long and relatively complicated) application with the IRS in order to get their tax exemption; churches are unique in this regard. A church is automatically exempt, even with no filing. But even for churches, the exemption isn’t free. A public charity can lose its exemption if it acts badly. The two most prominent ways it can act badly are by campaigning for or against a candidate for office and by engaging in too much lobbying.
In general, the first proscription is pretty straight-forward. If a public charity, including a church, supports or opposes a candidate, it loses its exemption.[fn5]
The lobbying is a tougher question. Basically, “no substantial part” of a public charity’s activities can involve attempting to influence legislation. But how much lobbying constitutes “no substantial part” is a tricky line to draw. One court found that where less than 5% of a public charity’s actions were devoted to influencing politics, the public charity didn’t cross the “no substantial part” line. On the other hand, a couple of courts have found that ~16% crossed the line.
And if a church were to lose its exemption, two things would happen. First, it would be taxable on its taxable income. Second, donors (in our case, those paying tithing, fast offerings, and other offerings that go in the tithing envelope) would no longer be able to deduct their donations in determining their taxable income.
As a policy matter, it’s certainly fair to ask whether public charities should be permitted to engage in politics at all, given their subsidy, or should be prevented from campaigning, given the First Amendment. It’s fair to ask whether churches, charities, or the NCAA should be exempt from tax in the first place, and whether donations to such organizations should be deductible. It’s even fair to argue about whether this church or that one crossed a line in its political participation. But, as a baseline, there’s probably some value in knowing what the current rules are, where they came from, and how they’re applied.
[fn1] I should point out that I’m only aware of one church ever losing its tax exemption over politicking.
[fn2] To international readers, I’m sorry. This is a US-centric post, mostly because I’m familiar with the US tax law applicable to public charities, but not to any other country’s laws. Of course, if you are non-US and you know how your country’s tax law treats churches/charities, I’d love to hear about it in the comments.
[fn3] Revenue Act of 1894, 36 Stat. 11 sec. 38.
[fn4] I’ll use “public charity” rather than “tax-exempt organization,” mostly because the rules for 501(c)(3) organizations are different from the rules for other entities that don’t have to pay taxes.
[fn5] It is not, of course, quite that straight-forward. On the margins, there is always the question of whose actions will be imputed to the tax-exempt. And what constitutes supporting or opposing a candidate. And, even if the entity clearly supports a candidate, the IRS has to discover the support and act on it. Nonetheless, this rule is about as bright-line as they come.