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Form 1099-MISC Failure to File Penalties Update For Churches and Christian Ministries

Question:

What are the consequences for a church or Christian ministry failing to file a required Form 1099-MISC?
Answer:
An organization that fails to file a Form 1099-MISC as required by the IRS and cannot show reasonable cause may be subject to severe financial penalties, as outlined in the IRS instructions (Section O. Penalties) for the form: $50 per information return if you correctly file within 30 days; maximum penalty $547,000 per year ($191,000 for small businesses)$100 per information return if you file correctly more than 30 days after the due date but by August 1; maximum penalty $1,641,000 per year ($547,000 for small businesses)$270 per information return if you file after August 1 or you do not file required information returns; maximum penalty $3,282,500 per year ($1,094,000 for small businesses)Based on these penalties, churches should be mindful of the filing requirements. 
The most common expenditures that churches make subject to Form 1099-MISC …
Recent posts

Pastor's Mid-year Resignation Effect on his Annual Housing Allowance

Question:
Every December, a church designates its pastor's next year's housing allowance. Its pastor resigned during the year to pursue other employment. How should his annual designated housing allowance be assigned to part-year compensation?
Answer:
To our knowledge, there is no specific guidance available in IRS regulations or rulings or in court case records to authoritatively clarify this reporting. It seems appropriate, however, that the annual housing allowance should simply be prorated over the time he was employed by the church. This situation does demonstrate the potential wisdom of documenting housing allowance as a monthly amount since mid-year turnover in the office of a pastor is not an uncommon event.
A pastor contemplating an earlier departure may wish to declare (or request) in advance that his housing allowance be increased immediately for the remainder of his service.
The minister's church or other qualified organization must designate the house allowance pur…

New Tax Law Summary and Implications for Individuals and Businesses

The following summaries highlight major changes in tax law.
New Tax Law Topics for INDIVIDUALS1. Standard Deduction and Personal Exemptions—The married filing joint standard deduction rises from $13,000 to $24,000, BUT the $4,050 personal exemption for each family member is gone.
2. Tax Rates—Seven brackets with rates between 10 and 37 percent replace the current range of 10 to 39.6 percent. Favorable rates for capital gains and qualified dividends remain.
3. Child Tax Credits—Each child under the age of 17 gains the family a $2,000 tax credit (up to $1,400 can be refunded even if the family has no tax). For 2017, these amounts are $1,000 and $1,000, respectively.
4. Itemized Deductions—Changes are coming for most taxpayers related to state tax payments, interest deductions and unreimbursed employee business expenses.
· Write-offs for state income taxes and property taxes cannot exceed $10,00.
· Interest paid on a home equity loan is no longer deductible.
· …

Scholarship Checks Payable To Whom?

Question:
A church would like to award a scholarship to a young person attending a Christian College. Should the check be made payable to the student or the institution?

Answer:
The check should be made payable to the institution. We recommend that additional information be communicated to the institution including the name of the student and a note related to the scholarship with wording such as:

"The accompanying check is awarded to a student of the University or College as a scholarship subject to Internal Revenue Service filing instructions for Form 1098-T as cited here:
Form 1098-T, Box 5 'Scholarships and grants generally include all payments received from 3rd parties (excluding family members and loan proceeds). This includes payments received from governmental and private entities such as the Department of Veterans Affairs, the Department of Defense, civic, and religious organizations, and nonprofit entities.'"

Here's the problem:
A check made out to the stud…

Medicare vs. Employer Health Coverage

Question:
Can a church with an active employee 65 years of age drop the employee's health coverage in favor of assisting the Medicare eligible employee with Medicare premiums?

Answer:
"The Age Discrimination in Employment Act (ADEA) which is administered by the Equal Employment Opportunity Commission requires employers of 20 or more employees to offer to their age 65 or over employees and to the age 65 or over spouses of employees of any age, the same coverage, and under the same conditions, as they offer to employees and employees" spouses under age 65."
(https://secure.ssa.gov/poms.nsf/lnx/0600620177)

The following source addresses employer reimbursements of Medicare premiums: "In general, when an employee (or his or her spouse) is eligible for Medicare due to age, an employer may reimburse his or her Medicare premiums only when: 1 The employer’s group health plan is a secondary payer to Medicare because the employer has fewer than 20 employees; AND 2 The rei…

401(k) distribution rollover to 403(b) plan

For a quick review, readers should be reminded that ministers may be eligible to make contributions to an Internal Revenue Code section 403(b) plan established by their not-for-profit employers. The traditional 401(k) plan is available to for-profit employers. Also, ministers' distributions at retirement taken from 403(b) plans may be designated as non-taxable housing allowance.

See other postings on this blog for a refresher of these rules:
403(b) Retirement Distributed as Housing Allowance Question 1: An ordained minister, formerly working for a for-profit company, is now working for a nonprofit ministry. His former retirement plan was a 401(k). The current employer offers a 403(b) plan. Can a 401(k) distribution be rolled over into a 403(b) plan? Answer 1: According to IRS Publication 571,

You can generally roll over tax free all or any part of a distribution from an eligible retirement plan to a 403(b) plan.” Question 2: But should a minister consider doing so? Will the ability …

Gain on Sale of Land by Church

Question:
A church wishes to sell a five acre lot of land. The church obtained the property 15 years ago and had the plan of building on the property, but it since abandoned those plans. If it sells the property will it be taxed on the gain?
Answer: This gain will not be taxed since the church did not hold the property primarily for investment or as inventory in the sense that a real estate developer might purchase and improve property for eventual sale. The 26 U.S. Code § 512 - Unrelated business taxable income lays out what income can be taxed to a tax-exempt organization. According to 26 U.S. Code § 512 - Unrelated business taxable income, "There shall be excluded all gains or losses from the sale, exchange, or other disposition of property other than—
(A) 
stock in trade or other property of a kind which would properly be includible in inventory if on hand at the close of the taxable year, or (B)  property held primarily for sale to customers in the ordinary course of the trade or b…

Batteries as Housing Allowance Expense

Question:
Do batteries qualify as a housing allowance expense?

Answer:
The expenditure for batteries, if meeting the following general guidelines for use in connection with the pastor's personal residence, may meet the requirements. Although there are not likely court cases or Revenue Rulings citing the exact examples offered here.

In a June 2016 post, we shared the following:

"A minister’s housing allowance benefit is non-taxable income to the extent that the allowance is used for housing expenses. The three-part test includes consideration of the fair rental value of the home, plus actual costs of utilities (see this blog post regarding the three-part test). In addition, the expenses must be incurredrelative to the minister’s principal residence. According to Federal Tax Regulations, Regulation, §1.107-1, Internal Revenue Service, Rental Value of Parsonages, only food and servants are specifically excluded."

If, for example, the batteries are for a smoke alarm in the ho…

A "Gift" from Gain on Parsonage

Question:
A church would like to "gift" 10% of the sale price of the parsonage to a pastor towards his retirement. Is the pastor going to be subject to income tax on that gift? Is it taxable if put into an IRA
on his behalf?

Answer:
Whether the gift is paid is paid to him directly or through contributions to his Traditional IRA, the “gift” will be taxable and reportable on Form W-2, Box 1. Internal Revenue Code section 102(c) clearly states that gifts given to employees by their employers are taxable compensation. The IRS has consistently applied this provision to self-employed (non-employee) individuals who provide services for an organization as well. Only the facts and circumstances surrounding a gift can determine whether IRC section 102(c) does or does not apply; a letter stating that a payment is a gift will not override the substance of a transaction (2008 Blog).

Having said this, the church may wish to consider other alternative means. For example, cooperation with the p…

Special Topic: A Great Cloud of Witnesses, William Carey

William Carey: The Father of Modern Missions by S. Pearce Carey, 1923, The Wakeman Trust, London, ISBN 978-1-870855-61-7 Follow link for an Introduction to the Cloud of Witnesses series

S. Pearce Carey, William Carey’s great grandson, offers a family perspective on the brilliant mind and consecrated life of one who first left England to reach to the regions beyond with the Gospel of Jesus Christ.  From the historical setting of his birth on August 17, 1761, to the legacy he left in the land of India and upon the world following his death on June 9, 1834, Carey’s life story leaves its reader with a sense of enablement to attempt great things for God. For William Carey once said,

Expect great things from God. Attempt great things for God.
It was 32 years before Carey left England never to return. He was motivated by the lives and stories of such men as Captain John Cook, explorer of the islands of the South Pacific and mapper of New Zealand and present day Australia; slave trader turned abol…