Are There Advantages to Being a Faith-Based Nonprofit?

Faith-based charity feeding children.
Faith-based charities, such as churches provide many community social services. Peopleimages/E+/Getty Images

What Is a Faith-Based Nonprofit?

A reader asked: "I am helping a new non-profit organization get started. In the course of our discussions, they said they are contemplating becoming a "faith-based" nonprofit vs. a non-faith based one. Is there any difference between these two designations? What are the benefits and disadvantages?"

I asked Emily Chan, a San Francisco-based nonprofit attorney, to explain the differences between faith-based nonprofits and the usual 501c3 charitable nonprofit.

The Basics

A Faith-based organization (FBO) is not a legal term, but it often refers to religious groups and other charitable organizations affiliated with a religious group. 

For example, the Corporation for National and Community Service says that an FBO usually includes:

  • A religious congregation (church, mosque, synagogue, or temple)
  • An organization, program, or project sponsored/hosted by a religious congregation (may be incorporated or not incorporated)
  • A nonprofit organization, founded by a religious congregation or religiously-motivated organizers and board members that clearly states in its name, incorporation, or mission statement that it is a religiously-motivated institution 
  • A collaboration of organizations that explicitly includes organizations from the previous categories.

Thus, the decision to be an FBO may depend more on whether the primary purpose or activities of the organization are religious or religiously motivated than on any advantages or disadvantages associated with such a label.

If the primary purpose and activities of the organization are not religious (as for a church) but religiously motivated, the organization may want to consider the pro and cons of identifying itself as an FBO and a particular type of FBO, such as a church or religious corporation.

Perhaps the primary considerations for identifying as faith-based revolve around how that designation affects donors, funders, supporters, beneficiaries, and other stakeholders. In other words, how does your organization want to be seen or branded?

There are no direct legal benefits associated with being identified as an FBO.

Benefits vs. Disadvantages

However, there are advantages and drawbacks related to being a particular type of FBO.

For example, churches that meet the requirements of Section 501(c)(3) of the Internal Revenue Code can claim tax-exemption without a determination from the Internal Revenue Service (IRS). Churches have the option of applying for 501(c)(3) exemption or not. Even when they don't apply, they are automatically considered to be exempt for tax purposes. 

Churches and other FBOs enjoy special protections that limit how and when the IRS may audit them. Also, specific religious organizations, including churches, are exempt from filing IRS Form 990 and may be exempt from filing state information returns and charitable solicitation registrations.

Can FBOs Receive Grants From Foundations?

FBOs may not be eligible to receive grants from foundations or corporations that do not want to advance or be associated with any particular religion or religious purpose.

However, FBOs that do not promote a belief in a specific faith may be eligible for grants if they are 501(c)(3)s. FBOs that are not IRS designated 501(c)(3)s will likely not be able to receive grants. Foundations are usually limited to making grants only to 501(c)(3) charities.

Foundation and corporate funding of faith-based organizations may be limited but does exist. Community foundations seem especially interested in funding both social services and religiously affiliated organizations.

An examination of the grants issued by the largest "faith-friendly" foundations indicates giving by foundations to religious organizations varies considerably and suggests that family foundations and smaller foundations are the most likely to give.

Many foundations target particular social services and fund projects whether or not they are provided by an FBO. 

FBOs are referenced in several laws that recognize their eligibility to receive grants under certain specified conditions and their continued right to consider religion when hiring staff.

Federal Funding

Charitable Choice laws, signed by former President Clinton during 1996-2000, specify that FBOs cannot be excluded from the competition for federal funds just because they are religious. But they do not set aside funds specifically for FBOs. Both President Bush and President Obama took steps to be inclusive when it came to FBOs and government funding.

Under President Trump, the federal government has been exceptionally friendly to religious groups, even setting up a "White House Faith and Opportunity Initiative."

In general, however, Federal grant funds may not be used for inherently religious activities such as worship, prayer, proselytizing, or devotional Bible study. The funds are to be used for the objectives established by Congress, such as creating the conditions for economic growth and prosperity.

Note: This article is just for informational purposes. It is not intended to be legal advice. Check other sources, such as the IRS, and consult with legal counsel or an accountant.