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"Free Labor" in Exchange for Charitable Donations

Question:

A church youth group is going on a missions trip this summer. There a few youth members who have yet to bring in the necessary amount needed for their trip. A couple in the church has offered to give towards their trip in exchange for work around their house. How is this treated? Is this allowable?

Answer:
Our MinistryCPA experience leads us to believe that in most cases the value of the work that is being completed by the youth members is not representative of the donation amount. It often appears to us that the young people are essentially volunteering so that a homeowner will consider making a donation, rather than providing taxable, fair value services. This kind of work is sometimes referred to as a "makework proposition" (e.g. raking leaves, washing windows, trimming hedges).

Source: http://www.samiyouth.org/awesome-job-ideas-teenagers/



Recent posts

Travel for Mission Trip Deductible as Charitable Donation

Question:

A church regularly sends out teams on short-term mission trips to destinations hosted by charitable organizations. They have set up a fund for receiving special offerings and for reimbursing travel, meals, and lodging expenses. Recently, a church team was required to pay the hosting organization a fee for each member to cover meals and lodging. The team leader required each team member to make a donation to the fund in the amount of the fee. Are these donations tax deductible?

Some argue that the team members are receiving a benefit from the donation and should not receive a tax benefit for the donations. Others feel they should qualify for a charitable donation because the benefit they receive only facilitates their charitable work. Besides, can't these expenses be deducted on the individual's Schedule A as out-of-pocket contributions even if the church doesn't consider them a donation?

Answer:

IRS Publication 526 says, "Generally, you can claim a charitable …

Housing Allowance and Form 1099-MISC Reporting

Question:

A church provides its minister a housing allowance, but believes it must report the full amount of compensation (including the non-taxable housing allowance portion) on Form 1099-MISC in order to demonstrate the full earnings of the minister.

If the church reports his compensation, including the housing allowance, on the Form 1099-MISC as taxable income, will he be able to deduct his housing expenses somewhere else on the Form 1040?

Answer:

This question brings up a couple of issues. First, most ministers are properly classified as employees who receive Form W-2, not as independent contractors who receive Form 1099-MISC. Box 1 on Form W-2 reports taxable compensation. It is reduced reflecting the church's designation of a portion of his pay as non-taxable housing. Then, in Box 14 (Other), Form W-2 typically reports as a memorandum item his additional non-taxable, housing allowance compensation.

Alternatively, the minister who receives Form 1099-MISC instead of Form W-2 mu…

Threat to Tax-Exempt Status? Renting Out the Church Parsonage

Question:

A church is looking to rent out its parsonage to a non-staff member. Can the income that is received for the rent be used for church expenses not related to the property without affecting the church's tax-exempt status?

Answer:

The church tax-exempt status will not be affected by the use of the rental income for expenses not related to the property. However, the church may lose its real estate tax exemption for the property because it is not used for an exempt purpose.

There are both potential Unrelated Business Income Tax (UBIT) and local property tax concerns. First, tax-exempt organizations generally do not need to report rental income as unrelated business income (UBI) unless it is financed with tax-exempt debt instruments. According to IRS Publication 598 (Page 10), "Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. Rents from personal property are not excluded." The IRS cites exceptio…

529 Plan Distributions NOT for Education

Question:

A mom and dad established a Internal Revenue Code section 529 college fund for their son, but he has decided to join the military instead. What are the penalties if the parents decide to pull the money out of the 529 college fund to give to him for uses other than college tuition? Does the family pay taxes only on the interest that was made or is the entire distribution treated as taxable income?

Answer:

Before we dive into answering the question it is important to understand that there are two types of 529 plans and that all fifty states and Washington D.C. use at least one of these two plans. The Securities Exchange Commission (SEC) defines both types. First, there are prepaid tuition plans which allow individuals to purchase credits at colleges/universities for future tuition at its current rate. These plans typically do not include room and board.

The second type, which falls in line with our question, is an education savings plan. Under this plan, an individual opens an …

Special Topic: Habits of the Useful Life

Over the past couple of years, I've taken a greater interest in reading Christian biographies. I've come to think of these individuals as our 21st Century "Cloud of Witnesses" (to borrow a concept from the Bible book of Hebrews, chapter 12, verse 2). Perhaps you too will find them encouraging, motivating, and worthy of emulation as I did. a Quotes from Our 21st Century Cloud of Witnesses: a As a 15 year old (and for the rest of his life), Hudson Taylor maintained "the habits of prayer and Bible study in which he had been trained from childhood" (p. 63, in Hudson Taylor in Early Years: Growth of a Soul by Howard Taylor, OMF International, 1911).
"Daily reading the Bible is the most stabilizing habit in my life" (Ben Peterson, p. 27, in Road to Glory: The 1972 Olympic Journey of Ben and John Peterson by Ben Peterson, Camp of Champs Publications, 2015).
Source: https://samaritanministries.org/blog/wrestling-experiences-prepared-petersons-for-ministry

&q…

Threat to Tax-Exempt Status? Using Facilities for Profit

Question:

Can a church member conduct piano lessons in her church's auditorium without threatening the loss of the congregation's tax-exempt status?

Answer:

Our answer comes from Matthew Davis, J.D., former attorney with the nationally recognized Christian Law Association, who currently practices law in Wisconsin, Illinois, and Florida.

"As a tax-exempt entity, churches must be careful not only in what activities they engage in directly, but also in how they allow the facilities to be used.

"The primary way in which this can come up relates to the requirement for tax-exempt status that the ministry's activities must relate to its exempt purpose. Assuming the church's exempt purposes are 'religious, charitable, and educational,' (three of the purposes specifically mentioned in the Internal Revenue Code 501(c)(3)), piano lessons would certainly fit within that expectation as 'educational' and therefore not be a problem on the tax-exempt purpose i…

Disbursing Designated Gifts to Short-Term Missionaries

Question:

A church is sending a married couple on an unpaid short-term missions trip overseas. The congregation has expressed interest in supporting them during their trip. What is the best method to support this couple?

Answer:

Let us offer two options for consideration.

First, the congregation gives directly to the church and designates that the amount goes toward the couple's mission trip. Over time, this fund would accumulate and then be given to the couple before leaving for their trip. This method would require preparation and filing of a Form 1099-MISC at the end of the year.

The second option to consider is likely the better of the two. While the couple is on their mission trip, they will submit records of their expenses to the church and be reimbursed for that amount out of the same fund that is designated for them - likely a "Special Projects-Missions Fund" of some sort. Unlike the first method mentioned, this would not require a filing of Form 1099-MISC if 100%…

Pastor's Social Security and Medicare Tax Assistance: Why is it Taxable?

Question:

A treasurer recently asked:
"I recently became the treasurer for our local church and am trying to nail down what I need to include as income for our pastor's Form W-2. I was told that income includes weekly salary, monetary gifts, and half of the quarterly taxes that we pay directly to him. The first two items I get, but why would we include the quarterly taxes (and only half that amount) as income?"   

Answer:

In order to answer a question like this, it is important to understand the difference between a Federal Insurance Contributions Act (FICA) church employee and a Self-Employed Contributions Act (SECA) church employee.

FICA employees have 7.65% withheld from each of their paychecks to contribute towards Social Security and Medicare. Their employers contribute an additional 7.65% to total the 15.3% tax due for FICA employees. Examples of FICA church employees include: administrative assistants, janitorial staff, and any other non-minister workers.

SECA e…

"Erroneous" Form 1099-MISC Issued to Missionaries

Question:

A missionary receives a Form 1099-MISC from a church for which he provided no direct services during the year. His mission agency issues him a Form W-2 or Form 1099-MISC for his full missions support. Is the Form 1099-MISC income reported by the church also taxable?
Answer:
It is apparent that the church in the question above distributed money to the missionary, otherwise no Form 1099-MISC would have been issued. There are three likely explanations for a situation of this nature:

The first possibility takes place when the missionary receives income from a supporting church which is remitted directly to his mission agency. The agency will then report the income to the missionary on a Form W-2 or Form 1099-MISC.

The second possibility is similar to the first, except the missionary is the one who receives the money, not the mission agency. However, the missionary does report the income to the agency which will, in turn, report the earnings to him or her on Form W-2 or Form 1099-…