February 17, 2017

Non-deductibility of Charitable Use of One's Property

Question: 

A church member is allowing one of its missionaries to live in one of her rental properties for a year. Is she able to get a tax deduction for this generous act? If so, what is the church's responsibility to the church member who is providing the free rental?

Answer: 

This donor would not be able to deduct the expenses in this situation because of the partial interest rule. According to IRS Publication 526, "Partial Interest in Property Generally, you can't deduct a charitable contribution of less than your entire interest in property. A contribution of the right to use property is a contribution of less than your entire interest in that property and isn't deductible. Example 1. You own a 10 story office building and donate rent free use of the top floor to a charitable organization. Because you still own the building, you have contributed a partial interest in the property and can't take a deduction for the contribution."
Hence, the church has no responsibility in this case with regard to a charitable contribution. However, a thoughtful thank you, of course, should be extended for this unselfish act.

Written Acknowledgement of Donations to 501(c)(3) Organizations

Question:

A church official is responsible for providing contribution receipts to the members of his congregation for their tithes and offerings which they have given for the year. Several members of the congregation make their contributions by placing a check in a giving envelope. However, they intentionally do not put their names on the envelopes. Is it required by law that the church official keep track of what they are giving through their checks and give them a contribution receipt at the end of the year?

Answer:

A charitable organization is not required by law to issue receipts to donors for their contributions. However, in most cases, donors cannot receive a charitable tax deduction without the cooperation of the organization. We suspect that a charity that fails to serve its donors in this respect will soon lose its support.

According to IRS Publication 1771 an organization should prepare and send out written acknowledgments to to donors by January 31 following the tax year. This requirement mandates that organizations keep records of donors' contributions. Although the donor did not specify his name on the outside of the offering envelope, his name is on the check and can be traced as a contribution to the organization. 

Pub 1771 states why donors need written acknowledgements:

"A donor cannot claim a tax deduction for any single contribution of $250 or more unless the donor obtains a contemporaneous, written acknowledgment of the contribution from the recipient organization. An organization that does not acknowledge a contribution incurs no penalty; but, without a written acknowledgment, the donor cannot claim the tax deduction. Although it’s a donor’s responsibility to obtain a written acknowledgment, an organization can assist a donor by providing a timely, written statement containing: 
1. the name of organization 
2. the amount of cash contribution 
3. a description (but not the value) of non-cash contribution 
4. a statement that no goods or services were provided by the organization in return for the contribution, if that was the case
5. a description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution  
6. a statement that goods or services, if any, that an organization provided in return for the contribution consisted entirely of intangible religious benefits (described later in this publication), if that was the case."

Substance Over Form--Description and Example

Question:

A woman gifted a large amount to a specific church need by recording her restriction of the gift in the memo section of her check. The need had been communicated at a public meeting of the church but no formal designated fund had yet been established.

The church's Constitution states, "all contributions made to specific funds or otherwise designated remain subject to the exclusive control and discretion of the [leadership] of the church."

Is this gift tax deductible even though it is designated to a need for which no formal solicitation had been made by the church and, therefore, some may argue, not under the control of the church?

Does recording the designation on the face of the check remove the "exclusive control" condition?

Answer:

We believe that although this gift was restricted, the gift is still under the control of the church. Wisely, the church's policy seems to clearly communicate this expectation. The church communicated the need before the gift was given and certainly endorsed the appropriateness of the designation.

The phrase "substance over form" refers to true intentions (or motives) of an action instead of the documentation of the action which may or may not be consistent with its true intentions (or motives). Of course, the Internal Revenue Service is especially suspicious of taxpayer attempts to produce documents that hide the true intentions (or motives) of an action. Nevertheless, the opposite may also be true--faulty documents must not necessarily override the otherwise legal or ethical actions of a taxpayer.

For example, just because someone writes on the check form “tax deductible donation for my son’s Christian school tuition bill” does not override the substance that he was paying his own personal obligation. Similarly, the substance of the donation to the church referenced in our question was in response to a public announcement of a need for which the donor received no direct personal benefit in return (no quid pro quo component). While recording a description in the memo section can disclose damaging truth, in this case, the donation is most likely deductible.

For more, entering "substance over form" in the search window of the IRS website will return numerous "hits" of its discussion and application of this concept.

February 12, 2017

Unusual Expenses Includable in Housing Allowance

Question:

A minister purchased a new riding mower and a new chain saw. Also, he had electrical wiring done by an electrician for an outdoor shed and his back porch. Plus, he paid to have a porch cover built for his front deck. May these costs be included in his housing allowance calculations?

Answer: 

The expenditures, if meeting the following general guidelines for use in connection with the pastor's personal residence, appear to 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 incurred relative 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."


However, often, large expenditures may not have an effect on the housing allowance as determined in accordance with the three-part test. Significant expenditures in one calendar year, often are limited by the fair rental value criteria. 

February 01, 2017

Pastoral Compensation in the Church Budget

Question:

The following question was posted to our blog:

"I want to know if all the tithes collected by the church [are] the income of the Pastor only?"

While we are not sure how to take this question, it does bring up two interesting considerations:

1. Are all tithes collected reported as income to the pastor? (a tax question)
2. What processes are advisable in determining how much of a church's income should be used to support its pastor and his family? (a budgeting question)

Answer:

Unless donor designated, contributions to a church are considered as donated to the ministry's general fund. Only the portion paid to the pastor as his salary out of the general fund is considered as income to him.

The church should have an established budget. For example, if the church does not have an established budget and all offerings are income to the pastor, how are the mortgage and utilities paid? Another issue if the church does not have an established budget, how are missions funded?

If a church wishes to develop a budget with an appropriate salary for its pastor, a great resource is Richard R. Hammar's annual handbook of compensation for church staff. We at MinistryCPA like to use this material as we advise churches. The resource considers variables such as the size of the church's attendance and income, the location of the church both within the U.S. and with respect to urban versus rural cost of living realities, and the pastor's education and tenure.