Religious Tax Exemptions: Overview

Current Laws, Requirements, Policies

Tax laws are more complicated than the average person can readily understand; tossing into the mix various things tax-exempt organizations might or might not be allowed to do threatens to make the task of understanding superhuman in nature. In reality, however, the issue isn’t all that complicated and the restrictions on what churches and religious organizations can do aren’t difficult to adhere to.

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1. Tax Exemptions Are Not a Right
The most fundamental thing to understand is that no group and no church is “owed” a tax exemption. These exemptions on various taxes are in no way protected by the Constitution — they are created by the legislatures, regulated by the legislatures, and can be taken away by the legislatures. At the same time, tax exemptions — including those for religious groups — are not prohibited by the Constitution.

More: Do Churches Deserve Tax Exemptions?

Court Cases:


2. Tax Exemptions Must Be Available to All
The only restriction on how the legislatures act when it comes to creating and giving out tax exemptions is that they are not permitted to do so based upon preferences for content or based upon a group’s failure to take certain oaths. In other words, once tax exemptions are created at all, the process for allowing certain groups to take advantage of them is restricted by constitutional rights.

In particular, they cannot give exemptions to a group merely because the group is religious, and they cannot take away exemptions for the same reason. If tax exemptions are created for magazines or books or whatever, the exemptions must be available to all parties, not just religious and not just secular applicants.

More: Are Tax Exemptions a Subsidy?

Court Cases:

  • Texas Monthly, Inc. v. Bullock


3. Tax Exemptions Are Related to Public Policies
If a tax-exempt group — religious or secular — promotes ideas which contradict important public policies (like desegregation), then the group’s tax-exempt status may not be granted or extended. Tax exemptions are provided in exchange for groups’ providing services to the community; when the groups undermine important goals of the community, then the tax exemptions are no longer justified.

More: When Charities Aren't Charitable

Court Cases:


4. No Tax Exemptions for Commercial Activity
Tax exemptions are almost entirely restricted to those affairs which are religious rather than commercial in nature. Thus, there are numerous tax exemptions on property owned by churches and used for religious worship, but exemptions are normally denied on property used for commerce and business. The site of an actual church will be exempt, but the site of a church-owned shoe store will rarely, if ever, be exempt.

Court Cases:

  • Diffenderfer v. Central Baptist Church

The same is true for income from sales. Money a church receives from donations of members and from financial investments are normally treated as tax-exempt.

On the other hand, money which a church receives from the sale of goods and services — even including goods like religious books and magazines — will normally have sales tax applied, though not income tax at the other end.

More: Commercial Tax Exemptions for Church Businesses

Court Cases:

  • Haller v. Pennsylvania


5. Employees Pay Income Taxes
People paid by the church, whether ministers or janitors, normally have to pay income taxes on their earnings. This is also true when it comes to other payroll taxes like unemployment insurance tax and Social Security tax. One exception on this are the Old Order Amish: they don’t have to pay such taxes when self-employed, but they do have to pay when they employ others, even other Amish.

More: Tax Exemptions Available to Churches

Court Cases:

  • Indianapolis Baptist Temple v. United States


6. No Political Activity For or Against Candidates Permitted
Church tax exemptions are in jeopardy if an organization engages in direct political activity either against or on behalf of a political candidate or in an attempt to directly influence the passage of particular legislation. Churches and religious organizations, just as any other tax-exempt charitable organization, are free to comment on any social, political, or moral issues. They may not, however, speak out for or against political candidates if they wish to continue being tax-exempt. Losing tax-exempt status can mean both having to pay income taxes and that donations to the group will not be tax deductible by the donors.

More: Backlash Against Tax Exemption Policies

Court Cases:

  • Branch Ministries v. Rossotti