Churches in the United States have been exempt from federal income tax since Congress’s first attempt to tax income in 1894, and local property tax exemptions for religious organizations reach back further into colonial practice. The framework was not created by any single law. It was built up over roughly two centuries through colonial custom, state constitutions, a sequence of federal revenue statutes, and Supreme Court decisions, arriving at what is now Section 501(c)(3) of the Internal Revenue Code.
Colonial Roots Before There Was a Federal Tax
Before exemption, there was subsidy. Several American colonies with an established church funded clergy salaries and church buildings directly through mandatory taxes on citizens. Religious organizations did not need tax relief because public money already flowed to them.
The Revolution changed that arrangement. In Virginia, James Madison’s 1785 “Memorial and Remonstrance Against Religious Assessments” argued that compulsory religious levies violated equality by “subjecting some to peculiar burdens” and “granting to others peculiar exemptions.” Virginia’s assessment bill was defeated, and other states dismantled their established churches over the following decades.
As direct funding disappeared, local governments turned to a different form of support: exempting church property from local assessments. This reflected both an acknowledgment that churches provided community services like poor relief and education, and a reluctance to have public officials appraising houses of worship or placing liens on them. By the late 1800s, when Congress first turned to federal income taxation, religious property tax exemption was already a settled feature of state and local practice.
The Tariff Act of 1894: The First Federal Exemption
The federal government’s first income tax carved out religious organizations from the start. The Wilson-Gorman Tariff Act of 1894 imposed a 2% tax on income over $4,000, and the statute exempted “corporations, companies, or associations organized and conducted solely for charitable, religious, or educational purposes.”1Internal Revenue Service. A History of the Tax-Exempt Sector: An SOI Perspective That is the first time the federal government formally recognized that religious organizations should be treated differently from for-profit businesses.
The exemption never actually operated. In 1895, the Supreme Court struck down the entire income tax in Pollock v. Farmers’ Loan & Trust Co., holding that taxing income derived from property was an unconstitutional direct tax that had to be apportioned among the states.2Ronald Reagan Presidential Library & Museum. Constitutional Amendments – Amendment 16 – Income Taxes The exemption itself was not at issue. But the pattern was set. Every subsequent federal attempt to tax income would carry a religious carve-out forward.
The 1909 Corporation Excise Tax Act
Congress found a way around Pollock before the Constitution was amended. The Revenue Act of 1909 imposed a 1% excise tax on corporate income, framed as a tax on the privilege of doing business rather than an income tax. It exempted any “corporation or association organized and operated exclusively for religious, charitable, or educational purposes, no part of the net income of which inures to the benefit of any private stockholder or individual.”1Internal Revenue Service. A History of the Tax-Exempt Sector: An SOI Perspective
Two pieces of that language survived into modern law. “Organized and operated exclusively” for exempt purposes became the core test for tax-exempt status. And the ban on net earnings benefiting private individuals became the anti-inurement rule that still governs 501(c)(3) organizations. The 1909 Act turned religious exemption from a one-off legislative choice into a structural feature of federal tax policy.
The Revenue Act of 1913: The Permanent Foundation
Ratification of the Sixteenth Amendment in February 1913 gave Congress constitutional power to “lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States.”3National Archives. 16th Amendment to the U.S. Constitution: Federal Income Tax (1913) Congress moved quickly. The Revenue Act of 1913 created the permanent federal income tax, and Section II, Paragraph G(a) carried forward the religious exemption for any organization “organized and operated exclusively for religious, charitable, scientific, or educational purposes, no part of the net income of which inures to the benefit of any private stockholder or individual.”4Federal Reserve Bank of St. Louis. Revenue Act of 1913 (Underwood Tariff)
That language is the direct ancestor of what is now 26 U.S.C. § 501(c)(3). Congress has amended and expanded the provision over the past century, but the core arrangement has not changed. Religious organizations remain exempt as long as their earnings do not enrich private individuals. The 1913 Act is where the modern era of church tax exemption really begins.
Walz v. Tax Commission: Constitutional Confirmation in 1970
For most of American history, no one seriously challenged whether religious tax exemptions violated the First Amendment’s ban on establishing religion. That changed in 1970, when Frederick Walz, a New York property owner, argued that the property tax exemption for churches indirectly forced him to subsidize religious institutions.5Cornell Law School Legal Information Institute. Frederick Walz, Appellant, v. Tax Commission of the City of New York
The Supreme Court unanimously upheld the exemption in Walz v. Tax Commission of the City of New York. Introducing the concept of “benevolent neutrality,” the Court held that the government was not sponsoring religion but simply declining to tax nonprofit organizations as a class. The majority wrote that “few concepts are more deeply embedded in the fabric of our national life, beginning with pre-Revolutionary colonial times, than for the government to exercise at the very least this kind of benevolent neutrality toward churches and religious exercise.”5Cornell Law School Legal Information Institute. Frederick Walz, Appellant, v. Tax Commission of the City of New York
The practical reasoning mattered as much as the constitutional theory. The Court observed that taxing churches would produce more government entanglement with religion, not less. Tax collectors would have to value church properties, assess religious organizations, and potentially place liens on or foreclose houses of worship. Exemption avoided that entirely. Walz remains the constitutional bedrock for religious tax exemption.
Later Limits: The Johnson Amendment and Bob Jones University
The exemption established by 1913 and confirmed in 1970 has since been narrowed at the edges by two important developments.
The 1954 Johnson Amendment
The most significant restriction on church exemption came from a political fight in Texas. In 1954, Senator Lyndon B. Johnson pushed an amendment through Congress prohibiting all 501(c)(3) organizations from participating in political campaigns for or against any candidate for public office.6Internal Revenue Service. Charities, Churches and Politics Johnson’s targets were secular nonprofits that had opposed his reelection, but the amendment applied to churches as well.
The restriction, codified at 26 U.S.C. § 501(c)(3), is absolute. A church that intervenes in a political campaign for or against any candidate risks losing tax-exempt status entirely.7Office of the Law Revision Counsel. 26 USC 501 – Exemption From Tax on Corporations, Certain Trusts, Etc. The same statute also caps lobbying: no “substantial part” of a 501(c)(3)’s activities can involve attempting to influence legislation. Churches can still speak on moral and social issues, register voters in a nonpartisan way, and publish educational materials on policy. What they cannot do is endorse or oppose a specific candidate.
Bob Jones University v. United States (1983)
If Walz established that religious tax exemptions are constitutional, Bob Jones University v. United States established that they are not unconditional. Bob Jones University, a religious institution, prohibited interracial dating and marriage among its students. The IRS revoked its tax-exempt status in 1976, and the university challenged the revocation to the Supreme Court.
The Court ruled 8-1 against the university. Entitlement to exempt status under Section 501(c)(3), the majority held, requires meeting common-law standards of charity, meaning that an organization must “serve a public purpose and not be contrary to established public policy.” Racially discriminatory educational institutions “cannot be viewed as conferring a public benefit” and therefore do not qualify.8LII / Legal Information Institute. Bob Jones University, Petitioner v. United States
The decision drew a line. Exemption is not an absolute right attached to religious identity. It is a benefit that depends on operating consistently with fundamental public policy, and the IRS has authority to evaluate whether an organization’s practices disqualify it even when those practices are religiously motivated.
What the Exemption Does Not Cover
Church tax exemption is broad, but it has never been total. If a church regularly operates a business unrelated to its religious mission, such as a commercial parking lot open on weekdays or a retail store selling non-religious merchandise, the profits are subject to unrelated business income tax. Any exempt organization with $1,000 or more in gross income from an unrelated trade or business must file Form 990-T.9Internal Revenue Service. Instructions for Form 990-T Property held or used for purposes unrelated to worship or religious education may also fall outside state property tax exemptions, which vary by state and often require a formal application to the local assessor.
Read together, the 1894 Tariff Act, the 1909 Corporation Excise Tax Act, the Revenue Act of 1913, the 1954 Johnson Amendment, and the Supreme Court’s decisions in Walz and Bob Jones explain both when churches became tax exempt in the United States and the shape that exemption has today. The answer to “when” is layered: property tax exemption was already customary at the state and local level before independence, federal income tax exemption was written into the very first attempt at a federal income tax in 1894, and the permanent statutory home for that exemption has existed continuously since 1913.