Wednesday, July 23

MinistryCPA Special Topic: IRA Considerations for Foreign Missionaries

Question:

As a missionary serving in Africa, I am treated as a 1099-MISC contractor by my U.S. mission agency. My self-employment earnings are approximately $60,000 and are considered 100% foreign-sourced income. Is it true that I may not be able to make contributions to my Traditional IRA or Roth IRA?

Answer:

Your retirement savings options greatly depend on how your tax return is filed. If you have no taxable compensation because 100% of your earned income qualifies for the foreign earned income exclusion (FEIE), you are ineligible to make IRA contributions. Any contributions made to your IRA during the period of your ineligibility are considered excess contributions. The excess contributions are subject to a 6 percent excise tax each year until the contribution is withdrawn per IRS requirements.

If you claim the Foreign Tax Credit (FTC) instead of the FEIE, you may qualify to make usual IRA contributions. You must meet the following requirements in order to make qualifying IRA contributions.
  • You must have taxable compensation.
  • You were not age 70½ by the end of the year (for a Traditional IRA).
  • Your modified adjusted gross income must be less than a specified amount (for a Roth IRA).
But if you are in a low-income-tax or no-income-tax country of service, you may not benefit by or qualify for the FTC. Other retirement options may need to be considered. Each missionary generally has a unique tax situation, and the missionary's tax preparer would best help determine if an IRA contribution should or should not be considered.

See IRS Publication 590 for more information, or click on this link for another great source on this topic.

Monday, July 21

Three Things to be Aware of When Establishing Online Giving Procedures

Question:
What items does our 501(c)(3) organization need to be aware of when establishing online giving procedures?

Answer: 
When a 501(c)(3) organization establishes online giving procedures, they should keep the following three points in mind:

1) Charitable contributions through an online merchant system should be recorded as the gross amount, not the net amount, when providing charitable giving receipts. 

For example, Joe Smith decides to donate $100 to ABC Organization, a non-profit organization, through the use of PayPal. PayPal will charge ABC Organization a processing fee of 2.9% ($2.90) for receiving the funds. Although ABC's net amount received is $97.10, Joe Smith should receive record of a deductible donation of $100. 

2) Contribution receipts should clearly meet IRS requirements. 

The following links will lead you to blog posts that relate to IRS requirements for contribution receipts:

Church Official Statements of Annual Giving

MinistryCPA Special Topic: What Does "Quid Pro Quo" Mean?

Also, read IRS Publication 1771 for more requirements of contribution receipts.

3) The 501(c)(3) organization must maintain discretion and control over all contributions. 

It is important that the non-profit organization maintain full control of the donated funds and practice discretion as to their use to ensure that the funds will be used to carry out the organization's functions and purposes. 

Accordingly, the organization may endeavor to honor donors' wishes that designate use of donated funds. However, the organization must maintain control over the ultimate determination of how all donated funds are allocated. Contributions become the property of the charity, and the charity has the discretion to determine how best to use all contributions to carry out its functions and purposes. 

According to IRS Publication 526, "Charitable contributions must be made to or for the use of a qualified organization in order to be deductible." If a contribution is made directly to an individual, it is not deductible. For example, if payments are made directly to individual missionaries, ministers, etc., the contribution is not deductible. 

The organization should also avoid becoming a conduit of funds. Read our blog posts on the matter:

Church as a Conduit for Non-Deductible Gifts

Church as a Conduit for Non-Deductible Gifts: Illustration

Unsolicited, Unilateral Gifts Directed to Individuals





MinistryCPA Special Topic: What Does "Quid Pro Quo" Mean?

Quid pro quo is Latin for "something for something," as in "give something to get something." A contribuiton made by a donor in exchange for goods or services is a quid pro quo contribution. If a donation is greater than $75, and the organization gives the donor something in return, the organization must disclose the value of that item or service to the donor.

Donors can only claim a deduction for the amount they contributed above the amount of the goods or services they received. For example, Susie Smith gives $100 to a 501(c)(3) organization, and Susie receives (from the organization) a water park ticket valued at $30. Susie can only claim $70 for her charitable contribution. Even though the part of Susie's payment available for deduction does not exceed $75, a disclosure statement must be filed because Susie's payment (quid pro quo contribution) exceeds $75.

Quid pro quo requirements state that if a donor does not receive goods or services for a contribution, a disclosure statement on the contribution receipt is still required. The disclosure must clearly state that the donor did not receive any goods or services from the organization.

Read IRS Publication 1771 for more information on quid pro quo contributions.

Friday, July 11

Possible Financial Effects of the Housing Allowance Ruling


Many of our readers have been paying close attention to the Wisconsin Housing Allowance Case. In November of 2013, Federal Judge Barbara Crabb declared the minister's housing allowance to be unconstitutional; the case is currently under appeal.

To familiarize yourself with the ruling, read our December 4, 2013 and February 14, 2014 blog posts concerning the case. Below, you will find some statistics based on research that we have performed.

What would your 2013 tax return have looked like if the housing allowance was denied?

Between January 1 and April 30, 2014, MinistryCPA prepared 64 returns for ministers who claimed a housing allowance in 2013 and would have experienced negative consequences had it been denied.

The average increase in federal and state income tax would have been $3,499, with a minimum increase in tax costs of $245 and a maximum of $10,531. Assuming our sample is representative of all U.S. ministers (and this is a stretch), the true average for all similarly situated ministers is between $3,000 and $4,000.

As we have mentioned in our related blog posts, there is no immediate impact on ministers or organizations. However, those who may be affected should keep a close eye on the development of the appeal. While the case is technically only applicable to the states of Wisconsin, Indiana, and Illinois, we believe that, were the ruling to stand, it would quickly be applied to all 50 states.

In a related matter, a Kentucky federal court recently dismissed claims by an atheist group of preferential tax provisions for churches.

Wednesday, July 2

"Net Income" Rules for a Non-Profit

Question:

Is a non-profit organization (NPO) allowed to make a profit during the year? If yes, is there a limit on the amount of income that can be carried over from year to year?

Answer:

A NPO is allowed to have an excess of revenues over expenditures in a given year or accounting period, and there is no specific cap set by the Internal Revenue Code. Generally, NPOs refer to this condition as a net increase, because it is simply an increase in funds available for use in furthering the organization's exempt purpose. However, NPOs should be aware of the following IRS guidelines regarding sources and uses of funds.

Unrelated Business Income Tax
Revenues derived from sources unrelated to the organization's exempt purpose may be subject to unrelated business income tax (UBIT). IRS Publication 598 covers the basics of unrelated business income tax. Also, our January 10, 2011 blog post lays out some specific IRS standards regarding UBIT considerations.

Private Inurement:
Courts have coined the term "private inurement" to describe when a NPOs money or other assets are devoted to private uses by insiders instead of the charitable purposes they were intended for.

According to the IRS, "No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization."

NPOs must carefully direct and document use of their funds toward clearly identified exempt purposes. Exempt purposes can be a nebulous term, but organizations that have applied for and received tax-exempt status from the IRS must have clearly stated purposes and should use any excess funds towards those purposes, rather than for the benefit of any private individuals. Specific uses of funds are at the discretion of the organization and its directors, but furthering the exempt purpose should always be the end goal. See this previous blog post for more on private inurement.

Designated Funds:
To answer the second question, it is very common for NPOs to report a substantial excess of revenues over expenditures in a Designated Fund. A Designated Fund is a specific fund used to finance or support an identified cause.

Designated Funds can either be initiated by the NPO or by a charitable donor. For example, a local church (the NPO) recently started raising estimated funds of $1 million for the construction of a new auditorium. The charitable donor can give money to be used specifically for the auditorium; the church cannot use the designated money for another purpose.

Let's say that at the end of the fiscal year, the church has raised $300,000 for the purpose of an auditorium. In this situation, the church may appear to have a very large "profit." However, as long as the money is designated for the purpose of the auditorium, the $300,000 increases a  "Designated Fund" which must be carried into the following year.