Monday, August 4

Sale of Church Parsonage - How is it Taxed?

Question:

When is the sale of a parsonage taxable to a minister? When is it taxable to the church?

Answer:

We have recently received questions concerning the sale of church property, specifically related to parsonages. This blog post will try and tackle three possible scenarios of selling a parsonage, and how the owner should treat the gain or loss of the sale.

Scenario #1 will assume that the minister (or taxpayer) is 100% owner of the parsonage.
Scenario #2 will assume that the church is 100% owner of the parsonage.
Scenario #3 will assume that the minister is 50% owner and the church is 50% owner of the parsonage.

Scenario #1
If the minister (taxpayer) is the 100% owner of the parsonage at the time of sale, then a number of factors must be analyzed to determine the gain or loss. IRS Publication 523 has complete details on Selling Your Home. In this recent, associated blog posting, we provide a quick overview of how to determine a gain or loss on the sale of a home.

Scenario #2
If the church is the 100% owner of the parsonage at the time of sale, then the gain or loss would be reported by the church, a non-profit organization, on its accrual basis (U.S. GAAP) prepared financial statements. If the church uses the cash or the modified cash basis of accounting, the gain or loss would likely not need to be reported on the financial statements.

From a tax standpoint, as long as the church does not regularly participate in the business of selling property, a gain on the sale of a parsonage would not be taxable. However, if a church frequently sells property and is in the business of selling property to a customer, the church will be subject to UBIT (Unrelated Business Income Tax). Non-profit organizations fall subject to UBIT when sources of revenue do not match the exempt purposes of the church.

To learn more about how a non-profit organization should treat gains or profits, read this blog post that we published a few weeks ago:

"Net Income" Rules for a Non-Profit

Scenario #3
If at the time of sale the minister owns 50% of the parsonage and the church owns 50% of the parsonage, this is considered joint ownership. Careful reconciliation and review of the original purchase documents is required to determine the correct allocation of gain or loss between the minister and church. The minister reports his portion of the gain on his personal tax return (if he does not meet the exception to exclude the gain), and the church reports its portion of the gain or loss similar to what is outlined in Scenario #2.

Saturday, August 2

How to Determine a Gain or Loss on Sale of Personal Residence

Question:

Does a minister need to report the gain or loss on the sale of his personal residence?

Answer:

IRS Publication 523 has complete details on Selling Your Home, but we will provide a quick overview.

The minister must know the selling price, the amount realized, and the adjusted basis in order to determine the gain or loss. The following formula can be used by a resident to determine his or her gain or loss:

  Selling Price
- Selling Expenses
= Amount realized
- Adjusted basis
= Gain or loss

The selling price is the total amount the minister receives for the home.

The amount realized is found by subtracting selling expenses from the selling price. Some common selling expenses include commissions and fees that were directly related to the sale of the home.

The adjusted basis consists of the increases or decreases of value that the home has incurred over the period of ownership by the resident. Look at IRS Publication 523 for instructions on how to determine the adjusted basis of a home.

The gain or loss is the difference between the amount realized and the adjusted basis. If the difference is a positive number, then there is a gain; if the difference is a negative number, then there is a loss. Generally, a gain on the sale of a home is taxable while a loss is not deductible. However, like most tax rules, there are exceptions!

According to 26 U.S. Code § 121, “Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.”

The code goes on to explain that a single individual can exclude the gain up to $250,000, while a husband and a wife who file a joint return can exclude up to $500,000 of the gain.

In order to qualify for this special exclusion of gain, residents must meet the ownership test and the use test. This means that during the 5-year period ending on the date of the sale, the resident must have owned the home for at least two years (the ownership test) and lived in the home as a main home for at least two years (the use test). Also, the resident must not have excluded gain from the sale of another home during the 2-year period ending on the date of the sale. Details and exceptions to these tests can be viewed in IRS Publication 523.

Monday, July 28

When a Church Incorrectly Withholds FICA from a Minister

Question:

Our church withheld FICA from our pastor's prior paychecks. Is the church required to correct prior payroll reports?

Answer:

Yes, if the church incorrectly withheld FICA from its pastor's paychecks, the church is required to file corrected federal payroll forms, including Forms 941 or 944, and Forms W-2 and W-3. If the employee is to be treated as a minister, the church must follow IRS requirements for ministers, which are different than general employee requirements.

Churches are fully subject to the provisions of Internal Revenue Code sections 1402(c) and 3121(b)(8) and Treasury Regulations under section 1402(c). The Internal Revenue Service's Minister's Audit Techniques Guide explains to IRS auditors, in brief, key ministerial tax matters that they must understand before conducting an audit on a minister's tax return. A quote from the Guide follows:
Although  a minister is considered an employee under the common law rules,  payments for services as a minister are considered income from self-employment pursuant to IRC §§ 1402(c) and 3121(b)(8). A minister, unless exempt, pays social security and Medicare taxes under the Self-Employment Contributions Act (SECA) and is not subject to Federal Insurance Compensation Act (FICA) taxes or income tax withholding.
It is important to note that this treatment is non-elective; the church must correct the federal payroll forms.

For a review on FICA taxes, read the following blog posts:

Refund of Incorrectly Withheld FICA Taxes from a Minister

Church Withholding of FICA Taxes

Review of Form W-2 Reporting for Ministers

Wednesday, July 23

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