Churches in California are tax exempt in the main categories that matter most: federal income tax, California franchise and income tax, and property tax on buildings and land used for religious purposes. Each layer works differently, though. The IRS treats churches as automatically exempt, but California makes a church apply separately for state income tax exemption and again for property tax relief at the county level. And a few taxes, including sales tax, stay in place regardless.
Federal Income Tax
Churches that meet the requirements of Internal Revenue Code Section 501(c)(3) are automatically treated as tax-exempt by the IRS, with no requirement to file Form 1023 or Form 1023-EZ.1Internal Revenue Service. Churches, Integrated Auxiliaries and Conventions or Associations of Churches A newly formed church can accept tax-deductible donations immediately, without waiting on an IRS determination letter.
Many churches apply for a determination letter anyway. The letter makes life easier with donors, banks, and state agencies, and as noted below, it also shortens the California application.
California Franchise and Income Tax
Federal recognition does not carry over to California. The state has its own exemption under Revenue and Taxation Code Section 23701d, which mirrors the federal 501(c)(3) framework: the church must operate exclusively for religious purposes, irrevocably dedicate its assets to those purposes, and prevent earnings from flowing to private individuals.2California Legislative Information. California Revenue and Taxation Code 23701d – Exempt Corporations
The exemption is granted by the Franchise Tax Board. A church that already has a federal determination letter can file the streamlined Form FTB 3500A, which asks for little beyond the letter itself and basic organizational facts.3State of California Franchise Tax Board. 2025 Instructions for Form FTB 3500A A church that never pursued the federal letter must file the full Form FTB 3500, including a Schedule 2, Section D specific to churches.4State of California Franchise Tax Board. 2025 Instructions for Form FTB 3500 Exemption Application Booklet
Skipping this step is costly. Any incorporated organization doing business in California without state tax-exempt status owes at least the $800 annual minimum franchise tax.5State of California Franchise Tax Board. Corporations If the FTB later revokes an exemption, that franchise tax obligation starts immediately.6State of California Franchise Tax Board. FTB 927 Publication Introduction to Tax-Exempt Status
Property Tax
Property is usually a church’s largest asset, and California offers three separate property tax exemptions. The right one depends on how the property is used and who owns it.
Church Exemption
The Church Exemption covers buildings, the land beneath them, and equipment used exclusively for religious worship. It comes from Article XIII, Section 3(f) of the California Constitution and is codified at Revenue and Taxation Code Section 206.7California Legislative Information. California Revenue and Taxation Code 206 Parking lots serving worshipers are covered under RTC Section 206.1.8California State Board of Equalization. Church Exemption A church that leases its worship space can still benefit: the property owner files a Lessors’ Exemption Claim, and the church completes an affidavit confirming exclusive worship use.
Religious Exemption
The Religious Exemption at RTC Section 207 is broader. It covers property used exclusively for religious purposes, which California defines to include preschools, nursery schools, kindergartens, and schools below collegiate grade owned and operated by the church.9California Legislative Information. California Code Revenue and Taxation Code – RTC 207 A congregation that runs a K-8 school on its campus would use this exemption instead of the Church Exemption, because the property serves religious and educational purposes together.
Welfare Exemption
The Welfare Exemption under RTC Section 214 is the broadest option. It covers property used exclusively for religious, charitable, hospital, or scientific purposes when owned by a qualifying nonprofit.10California Legislative Information. California Code Revenue and Taxation Code – RTC 214 It can reach administrative offices, community service facilities, and mission-related housing. The property cannot exceed what’s reasonably necessary for the exempt purpose, and no private individual can benefit through profit distribution or excessive compensation.
How to File and When
Each exemption has its own form, filed with the county assessor where the property sits:
- Church Exemption: Form BOE-262-AH.8California State Board of Equalization. Church Exemption
- Welfare Exemption, first year: Form BOE-267.11California State Board of Equalization. Use Requirements and Welfare Exemption Claim Forms
- Welfare Exemption, subsequent years: Form BOE-267-A.
- Church Lessors’ Exemption (filed by a landlord leasing to a church): Form BOE-263-C.12California State Board of Equalization. Property Tax Forms for Use by County Assessors Offices and Local Appeals Boards
A complete claim should include the Articles of Incorporation (with language irrevocably dedicating assets to an exempt purpose), financial statements, and a description of how each part of the property is used so the assessor can match activities to the exemption claimed.
The deadline is February 15. A full exemption requires a timely filing. A late claim filed before the January 1 lien date of the following year gets only 90 percent of the tax reduction. File later than that and the reduction drops to 85 percent.8California State Board of Equalization. Church Exemption On a property that would otherwise owe $20,000 in taxes, the gap between filing on time and filing late comes to $2,000 or $3,000.
What a Church Must Do to Keep Its Exemption
The organizational and operational rules behind these exemptions apply across state income tax and property tax, and a violation can put both at risk.
Irrevocable Dedication of Assets
The organizing documents must direct that, on dissolution, remaining assets go to another qualifying nonprofit rather than any private individual. California regulations are specific: the dissolution clause must send property to another organization that qualifies for the welfare exemption.13New York Codes, Rules and Regulations. 18 CCR 143 – Requirements for Irrevocable Dedication Clause and Dissolution Clause for Organizational Clearance Certificate for Welfare Exemption Generic Articles of Incorporation often lack this language, and the FTB will reject applications that don’t include it.
No Private Benefit
Net earnings cannot benefit a private shareholder or individual. The FTB and the Board of Equalization look for excessive salaries, sweetheart property deals, and personal expenses run through church accounts.2California Legislative Information. California Revenue and Taxation Code 23701d – Exempt Corporations A pastor’s pay doesn’t have to be low, but it does have to be reasonable compared to similar roles at similar-sized organizations.
Political Campaign Prohibition
All 501(c)(3) organizations, churches included, face an absolute ban on participating in political campaigns for or against any candidate for public office. The prohibition covers endorsements, contributions, and public statements favoring or opposing a candidate.14Internal Revenue Service. Restriction of Political Campaign Intervention by Section 501(c)(3) Tax-Exempt Organizations A violation can bring revocation of exempt status and excise taxes. Nonpartisan voter registration drives and candidate forums are allowed as long as they don’t favor any candidate.
Lobbying Limits
Churches can lobby to some extent, but it cannot become a substantial part of overall activities. The IRS weighs this case by case, looking at both time (including volunteer hours) and money dedicated to lobbying.15Internal Revenue Service. Measuring Lobbying – Substantial Part Test There’s no bright-line percentage. Occasionally encouraging members to contact legislators about a policy issue is safe. Devoting significant staff time and budget to legislative advocacy is not.
Taxes Churches Still Pay
Sales Tax
California does not exempt churches from sales tax. The California Department of Tax and Fee Administration has stated plainly that nonprofit or religious status does not create a sales tax exemption.16California Department of Tax and Fee Administration. Sales and Use Tax Annotations – 165.0138 A church buying furniture, building materials, or office equipment pays the same sales tax as anyone else. This catches many church leaders off guard, because they assume federal exempt status covers everything.
Unrelated Business Income Tax
Even a fully exempt church can owe federal unrelated business income tax on income from a trade or business, regularly carried on, that isn’t substantially related to the organization’s exempt purpose.17Internal Revenue Service. Unrelated Business Income Tax Renting out the parking lot to weekday commuters, or running a commercial bookstore open to the public, can trigger it. Gross unrelated business income of $1,000 or more means filing IRS Form 990-T.
Clergy Compensation
Churches don’t withhold Social Security and Medicare taxes from a minister’s pay the way an ordinary employer would. Ordained, licensed, or commissioned ministers are treated as self-employed for Social Security purposes, even when they are common-law employees. They pay self-employment tax (SECA) on salary, housing allowance, and the fair rental value of any parsonage provided.18Internal Revenue Service. Topic No. 417, Earnings for Clergy
A minister with religious or conscientious objections to public insurance can apply for exemption from self-employment tax using Form 4361. It has to be filed by the due date of the tax return for the second year in which net self-employment earnings reach $400 or more, with at least part of those earnings from ministerial services. Once granted, the exemption is permanent. It is not available for purely economic reasons.
The housing allowance is one of the more valuable benefits available to clergy. A church can designate part of a minister’s compensation as a housing allowance, which the minister then excludes from federal income tax. The excluded amount is capped at the lesser of what the minister actually spent on housing, the fair rental value of the home (including furnishings and utilities), or the amount officially designated by the church. The housing allowance is still subject to self-employment tax.