Friday, September 12

Journal Entries for Land Acquisition - Modified Cash Basis

Question:

A church is in the process of purchasing property and wants to use the modified cash basis. The church plans to pay for part of the property with cash while financing the remainder of the payments through a long-term note. What are the debit and credit effects of the following hypothetical scenario?

Hypothetical Scenario:

The property that the church desires to purchase costs $100,000. The church is able to pay $50,000 with cash, meaning that the remaining $50,000 will be financed through a long-term note. The church expects to pay monthly payments of $500 on the long-term note. 

Answer:

The modified cash basis, as we recommend its application, includes no long-term assets or liabilities on the balance sheet. Therefore, the journal entries for the above scenario are as follows:

*Capital Expenditures (debit)                          $50,000
          Cash (credit)                                                               $50,000

The above journal entry is the only current entry. However, monthly payments on the long-term note are recorded as follows:

**Long-Term Loan Payments (debit)             $500
            Cash (credit)                                                               $500

While the balance sheet for the church reports no long-term assets or long-term debt, most members of the congregation will be interested to know the status of the reduction in the amount owed on the long-term note. We recommend that the reports to the congregation include a recap of loan activity. In our example, the first year report would likely include a beginning balance of $50,000. The principal portions of the $500 monthly payments that are subtracted (the remaining portion being interest cost) should result in an ending loan balance equal to the remaining debt. 

We encourage our viewers to read the following blog post that we published in June of 2013:


*An expense account used only on a rare occasion such as this.
**An expense account that can and should be provided a general fund budget.

Donating a Timeshare Vacation to a Pastor

Question:

A member of our congregation owns a timeshare at a resort. He would like to donate a two week stay at the timeshare to our pastor. This situation leads me to ask the following questions: 

1)    The donor is requesting a deductible contribution letter. Is it appropriate for us to give him one?
2)    Is this situation taxable to our pastor?

Answer:

1)    There is little difference between this situation and donating one’s services. Remember, there is no deduction for donating one’s services. Similar to donating one’s services, the tax benefit of what this donor is contemplating is limited to the following:
  • He does not have to report income that he does not receive since he will collect no rent from the pastor.
  • However, we believe it is appropriate to provide a letter thanking the member for making his timeshare available. The letter should not be prepared on church letterhead; instead, it should be prepared and sent from the pastor himself.
  • Further, this is not an action taken by the pastor’s employer (it is not a corporate action taken by the church). A reminder of what is meant by “corporate action” and how it affects the deductibility of donations may be read at the following three blog posts that were published in the past:
2)    This situation is not taxable to the pastor. The pastor provided no services to the congregation (his employer) for which he is receiving this favor.

Monday, September 8

Housing Allowance and the Premium Tax Credit



Question:

Am I supposed to include my minister’s housing allowance when determining household income for the Health Insurance Premium Tax Credit?

Answer:

Per final regulations issued by the IRS and Department of the Treasury on May 18, 2012, household income is calculated as follows.[i]

Taxpayer’s adjusted gross income (AGI)
+All Dependents’ AGI (if required to file a tax return)
+Foreign earned income excluded from AGI
+Tax-exempt interest
+Social Security Benefits not included in gross income
Modified Adjusted Gross Income

The above calculation does not include an adjustment for housing allowance; therefore, the minister’s housing allowance that is excluded from federal tax is also excluded from household income for purposes of the Health Insurance Premium Tax Credit.

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.