June 28, 2016

Must a Missionary File a Schedule C?

Question: 

A church supports a missionary and follows up by issuing Form 1099-MISC reporting Non-Employee Compensation. The missionary was surprised to discover that he owed Social Security and Medicare Tax on this income. He submitted the following questions:

1.) Must I enter this amount on Form 1040, Line 12 as Business Income (I certainly do not consider myself a "business"), or may I report it in Line 21 as Other Income thereby bypassing SECA (Self-Employment) taxation?

2.) If I must add this amount to Line 12, may I then file Schedule C as if I were a business and therefore take business deductions?

Answer:

Since he is not an employee of the church which provides him partial support then it is correct that the church prepare and submit Form 1099-MISC. Reporting this amount on Line 21 as Other Income does not eliminate the SECA Tax obligation. However, reporting this income on Schedule C does enable the missionary to claim allowable business expenses against the support income. Many missionaries find means to reduce their overall tax obligation by virtue of benefits such as housing allowance designations, Form 4361 Opt Out from Social Security, and Form 2555 Foreign Earned Income Exclusion. But these provisions may be further explored in numerous blog posts on this site.

Missions Work Away from Tax Home

Question:

A missionary is doing mission work for less than one year away from his tax home. 
1.) Is he considered to be on a business trip the whole duration of the trip?
2.) What deductions is he able to take?
3.) May a self-employed person use the standard meal allowance?

Answer:

In this situation, the missionary is considered to be on a business trip/temporary assignment according in to IRS Publication 463. On page 4 the publication states, “Generally, a temporary assignment in a single location is one that is realistically expected to last (and does in fact last) for 1 year or less." 

One must then consider what expenses are allowable as deductions for a temporary assignment. Pub 463 states, “You can deduct ordinary and necessary expenses you have when you travel away from home on business. The type of expense you can deduct depends on the facts and your circumstances.” Table 1-1 in the publication provides a quick summary of deductible business expenses. 

According to page 6 of Publication 463, "You can use the standard meal allowance whether you are an employee or self-employed, and whether or not you are reimbursed for your traveling expenses."

June 27, 2016

Church vs. Ministry Organization Bases of Accounting

Question: 

Do churches use the same form of accounting as ministry organizations?

Answer:

Yes. Both a church and a ministry that follow Generally Accepted Accounting Principles use the same form of accounting – full accrual. But smaller churches tend to use a form of accounting such as the modified cash basis of accounting. Full accrual is governed by the rules set in place by the FASB (Financial Accounting Standards Board). FASB  116 and 117 are specific statements that discuss the application of full accrual accounting to a not for profit organization.

Resources regarding this topic:

  • We have a brief PPT linked on our website with a short comparison among the general three types of accounting. Presentation: Church and Christian Ministry Church Financial Management - http://www.ministrycpa.com/?q=alldownloads
  • Other possible resources may be explored on the website sponsored by Church Law & Tax Report  http://www.churchlawandtax.com/. Try typing in the search window terms such as "accounting" and "bookkeeping."

Special Offerings for Guest Speakers

Question:

When a church solicits special offerings for visiting guest speakers is the income taxable to the guest speakers, and are the contributions tax deductible by the donors?
      
Answer:

According to IRS Minister Audit Technique Guide, “Contributions made to or for the support of individual missionaries to further the objectives of their missions are includible in gross income (Rev. Rul. 68-67, 1968-1 C.B. 38)” (p. 6 of PDF). The offerings solicited for visiting guest speakers represent compensation for the services rendered. The offering income is taxable to the recipients. The guest speakers may be able reduce this income by business related expenses, but the offering must originally be included as income.

Although the income is taxable that does not automatically indicate that the offering will cause a tax deduction for the donors. The deductibility lies in the control of the monies and purpose of the organization. According to Richard R. Hammar in his book 2015 Church and Clergy Tax Guide, “Contributions to a church or missions agency for the benefit of a particular missionary may be tax deductible [by donors] if the church or missions agency exercises full administrative and accounting control over the contributions and ensures that they are spent in furtherance of the church’s mission” (p. 384-385).  Because the special offering is an act of the organization as a whole, the deduction can be afforded to the donor. 

For other posts on this topic search "special speakers"

Shopping for 403(b) Plans

Question: 

Some financial advisors have communicated that Internal Revenue Code Section 403(b) retirement plans sold by them are “uniquely able to provide tax-free withdrawals (as housing allowance) upon retirement for clergy.” Is tax-free treatment only available through specialized financial advisors selling 403(b) plans?


Answer:

IRC Section 403(b) plans are designed for tax exempt entities that wish to enjoy the benefits offered to businesses by similarly provisioned IRC 401(k) plans. When adopted by churches as their employee benefit plans, they are eligible for significant advantages to ministers including potential tax-free treatment upon retirement. This is true regardless of the investment plan administrator. Churches may contact investment advisors in their communities to determine whether they also can assist in establishing 403(b) plans. 

Please follow these links to past posts concerning this topic: