A reader asked: "I am helping a new non-profit organization get started, and I'm dealing with their incorporation issues and web page startup. 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 in these two designations? Is there any benefit to being a faith-based organization, in terms of availability of grants or anything else? Any insight would be appreciated."
A Faith-based organization (FBO) is not a legally defined term but it is often used to refer to religious organizations and other charitable organizations affiliated or identified with one or more religious organizations. For example, the Corporation for National and Community Service defines an FBO to include:
- 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 incorporators and board members that clearly states in its name, incorporation, or mission statement that it is a religiously motivated institution; and
- A collaboration of organizations that clearly and explicitly includes organizations from the previously described categories.
Accordingly, the decision of whether to be an FBO may depend more on whether the primary purpose or activities of the organization are religious or explicitly religiously motivated than on any advantages or disadvantages associated with such label. If the primary purpose and activities of the organization are not religious, but religiously motivated, the organization may want to consider the pro and cons of identifying itself as a FBO and/or a specific type of FBO (e.g., church, religious corporation). Perhaps the main considerations are how its chosen identity will affect its donors, funders, supporters, targeted beneficiaries, and other stakeholders.
There are no direct legal benefits associated with being identified as an FBO. However, there are benefits and drawbacks associated with being a certain 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) and have special protections that limit how and when the IRS may audit them. Additionally, certain religious organizations, including churches, are exempt from filing IRS Form 990 and may be exempt from filing state information returns and charitable solicitation registrations.
FBOs may not be eligible to receive grants from certain grantmaking entities that do not want to advance or be associated with a, or any, particular religion or religious purpose. However, FBOs that do not propagate a belief in a specific faith may be eligible. FBOs without an IRS determination of 501(c)(3) status may also be ineligible to receive grants because of the possibility that they do not actually qualify as a 501(c)(3) entity.
The Arizona Grantmakers Forum in 2005 noted that "information on foundation and corporate funding of faith-based organizations is limited." The best source is research conducted by The Roundtable on Religion and Social Welfare Policy, which is a research project of The Rockefeller Institute of Government.
One study of large private and community foundations (total annual giving of $1 million or more) suggests that a substantial percentage (12%) expressed interest in funding both social services and religiously affiliated organizations. An examination of the grants issued by the 50 largest "faith friendly" foundations indicates they provided $68.8 million to support faith-based social services in 1999 and 2000. This represents around 3% of the total annual philanthropic giving for these foundations. Little is known about the giving patterns of smaller foundations, but it is likely that their grants to faith-based organizations are significant.
FBOs are generally 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. "Charitable Choice" laws, signed into law by former President Clinton during the period of 1996-2000, specify that FBOs cannot be excluded from the competition for federal funds simply because they are religious. But they do not set aside funds for FBOs. Generally, 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 to further the objectives established by Congress such as creating the conditions for economic growth and prosperity.
Note: This communication was not written or intended to be used, and may not be used, by any taxpayer for the purpose of (i) avoiding any tax-related penalty under the Internal Revenue Code, or (ii) promoting, marketing or recommending a tax-related transaction described herein.