Texas asks less of a church than most treasurers fear, and more than most of them are tracking. Most church bookkeeping Texas guidance you will find online is federal advice with a state name attached. Texas has no state income tax return and no state version of Form 990, so many congregations assume the state has no interest in their books. That assumption is wrong. The Comptroller, your county appraisal district, the Attorney General's raffle rules, the Texas Workforce Commission and the state's unclaimed property program all reach into a church ledger. Each one expects a paper trail that your books either support or don't.
I'm Ricky West, and this is the audit I run when a Texas church hands me its books. It has fourteen items. Each one lists what a pass looks like and what a fail looks like. Before you start, gather three things: the last twelve months of bank statements, your accounting file (QuickBooks, ACS, PowerChurch, whatever you use), and the folder that is supposed to hold the church's exemption letters. A treasurer and one board member can usually finish it in an afternoon.
One boundary first. This is a bookkeeping audit, not legal or tax advice. Some fails raise a legal question, such as whether a lease puts an exemption at risk. Take those to your CPA or attorney. The bookkeeping job is to make the question visible.
Does your Texas church have its state tax exemption on file and working?
The Texas Comptroller exempts qualifying religious organizations from franchise tax, sales tax on purchases, and the state portion of hotel occupancy tax. The exemption is not automatic. The Comptroller's religious exemption guidance says a qualifying group must apply. To qualify, a group must be an established congregation that meets regularly at a designated location to hold worship services. Bible study groups, prayer groups, revivals and evangelistic ministries do not qualify under the religious category, even when a church sponsors them.
1. The exemption letter exists, and the Comptroller agrees
Pass: The Comptroller's approval of your Form AP-209 is in the permanent file. The church also appears on the Comptroller's Tax-Exempt Entity Search under its current legal name.
Fail: Nobody can find the letter. Or the church applied under a name it no longer uses after a merger, a plant or a rename. Or the search returns nothing. The Comptroller says religious groups do not need a federal exemption to qualify. Unincorporated churches, though, must send a governing document such as bylaws or a constitution showing that the organization is nonprofit. If yours never did, find that document before anything else.
2. Vendors are not charging the church sales tax
Pull three months of invoices from recurring vendors: office supplies, janitorial, AV and lighting, and online orders. In most of Austin the combined sales tax rate is 8.25 percent, which makes tax charged in error easy to spot.
Pass: Every recurring vendor has the church's Form 01-339 exemption certificate on file, and invoices show no tax. If a vendor would not accept the certificate, the file holds an Assignment of Right to Refund, so the church can recover the tax from the Comptroller directly.
Fail: Sales tax is buried inside supply and equipment expense lines where nobody sees it. A simple fix is a sub-account called Sales Tax Paid in Error. Its target balance is zero, and anything that lands there is a phone call to make.
3. Retreat and conference hotel bills skip the state hotel tax
Pass: Whoever books the youth retreat or staff conference gives the hotel Form 12-302. The folio then shows local hotel tax but not the 6 percent state portion.
Fail: The church pays the full rate every time. Keep in mind that the Comptroller says local hotel tax generally still applies, so a folio with some tax on it is not automatically wrong. What matters is whether the state line is on it.
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Do the church books protect your Texas property tax exemption?
Property tax runs on a separate track from the Comptroller. The chief appraiser of your county appraisal district grants the exemption: TCAD for Travis County, WCAD for Williamson, Hays CAD south of town. The church applies under Tax Code 11.20 on Form 50-117, the Application for Religious Organization Property Tax Exemption, and the application is due April 30. Once the exemption is granted, the church does not reapply every year unless the chief appraiser asks. The form does say the church must notify the chief appraiser in writing if and when its right to the exemption ends. That clause is where the books come in. The appraisal district won't know something changed unless someone tells it, and the person who sees the change first is whoever reads the ledger.
4. Every parcel in the books matches a parcel on the exemption
Pass: The fixed-asset register lists each property by its appraisal district property ID. It records what the property is used for (worship, clergy residence, or land held for expansion) and whether the exemption covers it. Each parcel has its own class or location in your accounting software, so its income and expenses stay tagged to it.
Fail: All land and buildings sit in one account called Building. Or the lot bought next door two years ago was never added to the exemption.
5. The parsonage produces no revenue
Form 50-117 covers a clergy residence on no more than one acre per residence, and only if it is used exclusively as a home for people whose principal occupation is serving in the clergy and it produces no revenue.
Pass: The parsonage class shows zero income. Its utilities and repairs are tagged to it, and the occupant is clergy.
Fail: During a pastoral vacancy the house was rented to a non-clergy family, and the rent went to Miscellaneous Income where nobody would notice. That deposit is exactly what a board needs to take to its attorney before the appraisal district finds it on its own.
6. Land held for expansion produces no revenue either
Here is a common scenario. A church on the edge of Leander buys twelve acres for a future sanctuary. A neighbor offers to cut hay on the back acreage and pays a few hundred dollars each summer. Later a wireless carrier asks about leasing a tower pad. Both feel like good stewardship. Under Form 50-117, though, land held for expansion or new construction qualifies only if it produces no revenue. Each of those checks goes straight to the basis of the exemption.
Pass: Every dollar of property-related income is booked to its own income account, tagged to the parcel, and flagged to the board. That includes hay leases, event parking, fellowship hall rentals and tower rent. Counsel reviews any lease before it is signed.
Fail: The income was deposited as a general offering, or it never went through the church's books at all.
Are church fundraisers recorded the way Texas law expects?
Being exempt on what the church buys does not make it exempt on what it sells. The Comptroller states plainly that exempt organizations must collect tax on most of their sales of taxable items. Churches trip over this rule more than any other.
7. Taxable sales have their own accounts and a liability
Pass: If the church sells regularly, through a bookstore, a coffee bar, conference merchandise or camp T-shirts, it holds a sales tax permit. Taxable Sales is its own income account, separate from contributions. A Sales Tax Payable liability builds with each deposit and clears when the return is filed.
Fail: Coffee bar and bookstore deposits go in with the Sunday offering. That inflates the giving the board sees and leaves the sales tax owed on those sales unrecorded.
8. Tax-free sale days are counted, not assumed
Texas lets exempt organizations hold two one-day tax-free sales or auctions each calendar year.
Pass: A log records which events used the two days this year, such as the fall festival or the youth silent auction.
Fail: Every rummage sale and auction is treated as tax-free because the church is tax-exempt.
9. Raffles meet the Charitable Raffle Enabling Act
Raffle rules in Texas changed recently, and a lot of church policy manuals haven't caught up. According to the Texas Attorney General, HB 2757 took effect in June 2021. It raised the number of raffles a qualified organization may hold from two to four per calendar year, and it raised the maximum value of each purchased prize from $50,000 to $75,000. Some rules did not change:
- A qualified religious society must have existed in Texas for at least 10 years.
- Cash prizes are prohibited.
- No one may be paid to organize or run the raffle.
- All proceeds must go to the organization's charitable purposes.
- Every ticket must show five required items, including the organization's name, the ticket price and the drawing date.
Pass: A raffle log records the date, each prize, whether it was donated or purchased, and its value. Ticket revenue is booked to a Raffle Proceeds income account, and purchased prizes are booked to their own expense line. The year's count is four or fewer.
Fail: The youth group ran a 50/50 drawing. That is a cash prize, and the Attorney General treats an unauthorized raffle as gambling under the Penal Code. A church planted six years ago cannot use the 10-year religious-society route. Whether it qualifies some other way is a question for its attorney, and the answer is needed before tickets are printed.
Is Texas church payroll set up for what the state actually requires?
Texas has no state income tax, so there is no state withholding. The hard payroll questions for churches are federal: clergy dual-status, housing allowances and SECA. Those are covered in our guide to church payroll and clergy taxes. The state layer is short, but payroll software often sets it up wrong.
10. The church is not paying state unemployment tax it doesn't owe
The Texas Workforce Commission excludes service in the employ of a church, or an organization operated primarily for religious purposes, from covered employment under the Texas Unemployment Compensation Act (Labor Code 201.066). Federally, 501(c)(3) organizations are also outside FUTA.
Pass: The church has no TWC unemployment tax account. Or it chose to elect coverage, and the board minutes record that decision.
Fail: The payroll provider set up a TWC account by default when payroll started, and the church has paid state unemployment tax every quarter since. One caveat: a separately incorporated preschool, daycare or school may not count as operated primarily for religious purposes. Ask your CPA before anyone changes the setup.
11. New hires are reported to the state
Texas employers, including churches, report new hires to the Attorney General's Child Support Division within 20 days of hire.
Pass: Your payroll provider files new-hire reports automatically, and someone has checked that the setting is on.
Fail: The church pays part-time nursery workers or a seasonal camp counselor by manual check outside the payroll system, and nobody reported them.
Which Texas records does church bookkeeping have to keep on file?
12. The Secretary of State shows the church in good standing
Pass: If the church is a Texas nonprofit corporation, SOSDirect shows it as active and the registered agent is current. The Secretary of State can require a nonprofit corporation to file a periodic report, no more than once every four years. The church answered the last notice it received.
Fail: The registered agent is a pastor who left in 2019, and the periodic report notice went to his old address. Ignoring that notice can lead to the corporation being involuntarily terminated. That is a hard way for a board to learn its corporate status lapsed.
13. The books are complete enough for the people entitled to see them
The Business Organizations Code requires Texas nonprofit corporations to keep current, accurate financial records. Section 22.355 exempts religious institutions from the public-inspection rule in section 22.353, so a member of the public has no statutory right to your ledger. Members, the board and your own bylaws are a different matter.
Pass: Every bank and card account is reconciled monthly. The board receives a regular monthly board financial report, and minutes record approval of the budget. The church financial policies and procedures say who can see what.
Fail: The last reconciliation happened when the previous treasurer left.
14. Stale checks are tracked for unclaimed property
The Texas unclaimed property program treats uncashed wages as abandoned after one year and most other property, including vendor checks, after three years. Holder reports are due July 1.
Pass: Every quarter, someone reviews outstanding checks older than 90 days. That includes a guest speaker's honorarium, a refund for a cancelled retreat, or a final paycheck to a worship leader who moved away. The church contacts the payee and keeps an aging list of checks nearing dormancy.
Fail: Old checks are quietly voided back to income. That is the most common cleanup shortcut, and it is exactly what unclaimed property rules exist to catch. If you already have a stack of them, ask your CPA how to report them.
What does a Texas-ready church chart of accounts add?
A church chart of accounts should already be built on fund accounting, with restricted and unrestricted money kept apart. The audit above adds a Texas layer on top. If you use QuickBooks Online, most of these items are a single class or sub-account, set up the way we describe in QuickBooks Online for churches.
- Income: Taxable Sales, Raffle Proceeds, and Facility Use Income, each tagged by parcel. Add Parsonage Income and Expansion Land Income, both of which should stay at zero.
- Liabilities: Sales Tax Payable. An Outstanding Checks Aging list tied to the unclaimed property calendar.
- Expenses: Raffle Prizes Purchased. Sales Tax Paid in Error, which should also stay at zero.
- Classes or locations: one for each appraisal district parcel.
- Permanent file: the AP-209 approval, a blank 01-339 and 12-302, the Form 50-117 approval with its property IDs, the most recent Secretary of State filing, the raffle log, and any TWC election.
The accounts that should stay at zero are the most useful ones here. They work as alarms. When one of them moves, the treasurer knows before the appraisal district, the Comptroller or the Attorney General does.
Reading your score
- Zero to two fails: Fix them this quarter and add the checks to the treasurer's year-end routine.
- Three to five fails: Assign one owner to each item, set dates, and report progress in the monthly board packet until everything passes.
- Six or more fails, or any fail on items 5, 6 or 9: Bring in counsel before the next appraisal notice or fundraiser. Then ask whether the current bookkeeping setup can realistically keep all fourteen items passing. How to choose a church bookkeeping service covers what to ask if the answer is no.
At Turnkey CFO, this list is where every Texas church engagement starts. No church we have seen passed all fourteen items on the first run, and very few had anything wrong that took more than a few weeks to fix.
Church bookkeeping in Texas: questions treasurers ask
Does a Texas church have to file a state tax return?
Not for income, because Texas has no state income tax. A church approved for the Comptroller's exemption also does not file franchise tax reports. If the church holds a sales tax permit for a bookstore or coffee bar, it files sales tax returns on those taxable sales. Your CPA can confirm what applies to your situation.
Do we need an IRS determination letter to get Texas tax exemption?
No. The Comptroller says religious groups do not need a federal exemption to qualify for Texas state tax exemptions. The church still has to apply on Form AP-209 and show that it is an established congregation meeting regularly for worship. Unincorporated churches must include their bylaws or constitution.
Can we rent out the fellowship hall without losing our property tax exemption?
That is a legal question, and the answer depends on the property, the use and how the arrangement is structured, so talk to your attorney first. The bookkeeping part is simple: record every rental dollar in its own income account, tagged to the parcel, so the board and counsel can see it.
Who does bookkeeping for small churches in Texas?
Usually one of three people: a volunteer treasurer, a staff member such as the church administrator, or an outsourced bookkeeper. Whoever it is should understand fund accounting and know the Texas paperwork: AP-209, Form 50-117, the raffle rules and unclaimed property. They should also know where their job ends. A bookkeeper keeps the records. Tax and legal questions belong with a CPA or attorney.
Frequently asked questions
Does a Texas church have to file a state tax return?
Not for income, because Texas has no state income tax. A church approved for the Comptroller's exemption also does not file franchise tax reports. If the church holds a sales tax permit for a bookstore or coffee bar, it files sales tax returns on those taxable sales. Your CPA can confirm what applies to your situation.
Do we need an IRS determination letter to get Texas tax exemption?
No. The Comptroller says religious groups do not need a federal exemption to qualify for Texas state tax exemptions. The church still has to apply on Form AP-209 and show that it is an established congregation meeting regularly for worship. Unincorporated churches must include their bylaws or constitution.
Can we rent out the fellowship hall without losing our property tax exemption?
That is a legal question, and the answer depends on the property, the use and how the arrangement is structured, so talk to your attorney first. The bookkeeping part is simple: record every rental dollar in its own income account, tagged to the parcel, so the board and counsel can see it.
Who does bookkeeping for small churches in Texas?
Usually one of three people: a volunteer treasurer, a staff member such as the church administrator, or an outsourced bookkeeper. Whoever it is should understand fund accounting and know the Texas paperwork: AP-209, Form 50-117, the raffle rules and unclaimed property. They should also know where their job ends. A bookkeeper keeps the records. Tax and legal questions belong with a CPA or attorney.