September 20, 2016

Coffee Shop as an "Integrated Auxiliary" of a Church

Question:

A church helped start a coffee shop which is a separate entity from the church. The primary goal of the coffee shop is to donate the profits to the church. Individuals have donated equipment to the church to establish the business. Can the donors claim charitable contribution deductions for the equipment?

Answer: 

Donors of non-cash gifts maybe be entitled to write-offs and should refer to IRS Publication 526 for further details regarding possible deductions.

The question brings up greater concerns than whether the donors can deduct contributions. For example:
  • Who takes responsibility for any legal compliance or liability concerns?
  • Does the ministry hold a Seller's Permit from the State in which it operates?
  • Is the ministry complying with all IRS and State employment laws for withholding taxes and other regulations?
  • Who is responsible for income taxes on profit, if it happens to fall under the classification as Unrelated Business Income?
Internal Revenue Service Publication 526 includes auxiliaries in the list of qualified organizations to receive deductible contributions. But according to IRS Publication 1828 in order for the coffee shop to be named as a integrated auxiliary it must meet these requirements: 
  • be described both as an IRC Section 501(c)(3) charitable organization and as a public charity under IRC Sections 509(a)(1), (2) or (3);
  • be affiliated with a church or convention or association of churches; 
  • and receive financial support primarily from internal church sources as opposed to public or governmental sources.
As an example, Publication 1828 notes that "Men’s and women’s organizations, seminaries, mission societies and youth groups that satisfy the first two requirements above are considered integrated auxiliaries whether or not they meet the internal support requirements."

The church leadership should pursue the assistance of professionals to help navigate these matters.

For more detailed information regarding integrated auxiliaries, see Code of Regulations, 26 CFR Section 1.6033-2(h).

Minister's Excluded Housing Allowance Income Subject to SE Tax

Question:

A pastor is receiving a $20,000 renting (housing) allowance per year, and he is currently paying Self-Employment (SE) tax on it. Is there a way to exclude this compensation from SE income status?

Answer:

He will not be able to exclude this amount from SE income. IRS Publication 517 states, "To figure your net earnings from self-employment (on Schedule SE (Form 1040)), include in gross income: 1. ... 4. The fair rental value of a parsonage provided to you (including the cost of utilities that are furnished) and the rental allowance (including an amount for payment of utilities) paid to you."

Further, the IRS Minister's Audit Technique Guide offers IRS agents the following guidance:
"Computing Self-Employment Tax
  1. Salaries and fees for services, including offerings and honoraria received for marriages, funerals, baptisms, etc.. Include gifts which are considered income as discussed under the section on income.
  2. Any housing allowance or utility allowances.
  3. Fair Rental Value (FRV) of a parsonage, if provided, including the cost of utilities and furnishings provided.
  4. Any amounts received for business expenses treated as paid under a nonaccountable plan, such as an auto allowance.
  5. Income tax or self-employment tax obligation of the minister which is paid by the Church.

If an exemption from self-employment tax is not applied for, or is not granted, self-employment tax must be computed on ministerial earnings. To compute self-employment tax, allowable trade or business expenses are subtracted from gross ministerial earnings, then the appropriate rate is applied."

MinistryCPA.org provides a sample Housing Allowance Worksheet that may be helpful.

Services to a Church in Lieu of Rent of Church Parsonage: Bartering

Question:

A church member rents the church parsonage for $1,000 per month. But in lieu of paying rent, he performs services for the church.
1.) Should the church report his earnings on a Form W-2?
2.) Is the church's tax-exempt status affected by the renting of the parsonage to a non-staff member?

Answer: 

The renter must include the $1,000 dollars per month as taxable income, and the church should issue him a Form 1099-MISC if he is an independent contractor or Form W-2 if he is an employee (likely also subject to FICA tax).

The major issue is not that the church will lose its overall tax-exempt status, but that it may lose the real estate tax-free status of the parsonage being rented to a non-staff member. The situation here relates to bartering for services actually performed as a part-time employee of the church, so the concern may be unwarranted.

For information regarding the effect on tax exempt status follow the link below:


September 08, 2016

Expenses of Selling Home as Qualifying Housing Allowance Expenditures

Question:

Are expenditures related to the sale of a home considered to be qualifying housing allowance disbursements?

Answer:

The Internal Revenue Code lists only food and servants as specific exceptions to otherwise qualifying housing allowance expenditures. The amounts must be incurred relative to the minister’s principal residence and for costs directly related to providing a home. According to Internal Revenue Regulation §1.107-1, Rental Value of Parsonages, only food and servants are specifically excluded.

With every housing allowance the three part test must be considered (see Ministry CPA Blog past post regarding the three-part test). For example, if a minister's fair rental value is less than his actual expenses, he would receive no tax benefit from including expenditures from the sale of his home. This is often the case in the event of the sale of a minister's home.

Mission Board Collecting Donations for Ministers' Mission Trips

Question:

If a mission board is receiving monies for an ordained minister from his friends and family in order to fund his mission trip, are those contributions deductible for the donors? Are the monies received by the ordained minister excluded from taxable income?


Answer:


Donor side: The contributions may be deductible for the donors. According to Richard R. Hammar in this book 2015 Church and Clergy Tax Guide, "IF a donor stipulates that a contribution be spent on a designated individual, no deduction ordinarily is allowed unless the church exercises full administrative control over the donated funds to ensure that they are being spent in furtherance of the church's exempt purposes. To illustrate, contributions to a church or missions agency for the benefit of a particular missionary may be tax deductible if the church or missions agency exercises full administrative and accounting control over the contributions and ensures that they are spent in furtherance of the church's mission" (p. 384-385). Each mission board is responsible to establish policies and procedures to assure that donors of charitable contributions receive documentation consistent with IRS regulations.

Recipient side: The exclusion from taxable income for ministry trip expense reimbursements received by the minister depends on whether he has set up a reimbursement plan with the mission board. According to IRS Publication 463, "A reimbursement or other expense allowance arrangement is a system or plan that an employer uses to pay, substantiate, and recover the expenses, advances, reimbursements, and amounts charged to the employer for employee business expenses." If the minister has documentation for his trip related expenses, the board will reimburse the minister with the funds set aside for him. If he does not keep records of his trip related expenses, the money given to him will be taxable income and the agency will be responsible to issue him the appropriate information return (e.g., Form W-2 or Form 1099-MISC).