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Designated Gift to a Missionary

Question:

A church recently held an ordination service for one of its members who is planning to go on a foreign missions trip. During the service, a $1,000 special offering was taken. Is this offering taxable to the missionary? Is it deductible by the donors?

After the offering has been given to the missionary, a friend gives another gift to the church. This gift is designated for the missionary, but "to be used as the church sees fit if the trip is fully funded." Can the church simply give this money to the missionary? And is this also deductible by the donor?

Answer:

In answering the first part, yes, the offering is taxable as compensation. Essentially, the church is "hiring" the missionary to help accomplish its own Great Commission mission. Because the missionary is "self-employed" for income tax purposes, the church should issue Form 1099-MISC, and the missionary should closely track and report business expenses to facilitate deductibility of those e…
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Gifts in Kind to Ministries: Where are They Reported on Financial Statements?

Question:

How should a church properly report Gifts in Kind on its financial statements? Are they included on an income and expense report or only on a donor's contribution statement?

These gifts could be intangible--for example, free-rent facilities from a landlord or services from a professional--or tangible--for example, a vehicle.

Answer:

Most churches do not record these gifts in their general ledgers for inclusion on their financial statements. Only churches undergoing independent Certified Public Accountant financial audits would typically consider reporting these amounts and then only if they are material.

According to FASB No. 116 (Page 4), "contributions of services shall be recognized if the services received (a) create or enhance non-financial assets or (b) require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation."

Regarding donor acknowledgement, the church should not…

Clergy Housing Allowance Survives Attack (For Now)

The relentless efforts of a Wisconsin family to pass judgment on the clergy housing allowance were again stalled by the 7th U.S. Circuit Court of Appeals in Chicago in a decision announced Friday, March 15, 2019. The Court reversed the decision of a lower court in Gaylor et al v. U.S. Treasury which ruled that the clergy housing allowance was unconstitutional.

Had the original decision stood, ministers in the states of Illinois, Indiana and Wisconsin would have lost the exemption from income taxation for church compensation designated to provide for clergy housing costs. As has been the case since the early days of social security, a clergy housing allowance remains subject to the 15.3 percent self-employment tax. We believe that the loss of the exemption to ministers within the 7th circuit would have quickly spread to all U.S. clergy.

As advisors to many ministers, MinistryCPA expressed concern not only with the financial and public policy attacks against religious ministries, but with…

Church and NPOs’ Employee Contributions by Payroll Deduction (Part 2)

Question: 

A pastor approaches a church treasurer and requests that money be withheld from his paycheck for his tithe. How should a ministry handle this request?

Answer:

There are two ways to look at this.

The first way involves directly reducing the pastor's taxable income. Although this may be considered a "great" tax planning move by some, it is possible this choice will run into trouble with the IRS. From a statutory perspective, the IRS would likely invoke the constructive receipt doctrine which states, in effect, that income you earn and are offered cannot be turned away simply for purposes of tax avoidance (IRS Publication 525).

Under these circumstances, the IRS would likely choose to add the income to the pastor's Form W-2 and tax it accordingly. The IRS would then permit him an itemized deduction; however, that may not turn out to be helpful if he chooses to take the standard deduction.

On the other hand, if the pastor is simply asking for it to be withheld s…

Church and NPOs’ Employee Contributions by Payroll Deduction (Part 1)

Question:

A church treasurer asks, “Is tithing from payroll legally acceptable? And, if yes, how can I set it up through QuickBooks?”




Answer:
Many church and not-for-profit organizations find that their own staff members are among their most faithful donors! And, yes, it’s actually a good option for some employees. Of course, the same confidentiality and fidelity that oversees the charitable gifts of others to the employer must be exercised on behalf of staff members.
In QuickBooks (Desktop version), set up a new payroll item and follow the sequence presented below.


Give the deduction a name. The church or NPO could even set up multiple payroll items if some employees wanted to make designated gifts other than unrestricted contributions.

Keep working through the sequence of intuitive QuickBooks windows until you reach the following setup window. None of the options here should be checked.

Next… AND VERY CRITICAL to calculate on net pay.


The final window enables the employer to set up default …

Review: Form 1099 Payments to 501(c)(3) Organizations

Question:

A church rented space from another church last year. Should it request a completed Form W-9 and issue Form 1099-MISC?

Answer:

Payments from one 501(c)(3) organization to another 501(c)(3) organization are not subject to Form 1099-MISC reporting. The IRS Instructions for Form 1099-MISC state that "payments to a tax-exempt organization" are exempt from reporting a Form 1099-MISC. 

The following are typical examples of payments of $600 or more by a church which are subject to reporting a Form 1099-MISC:
Rent paid to an individual (non-corporation)Payments for services rendered by individuals who are not employees (e.g. janitorial service, facilities, snow removal, guest speakers)Support sent directly to missionaries

Church Purchase of Materials Added to a Minister's Personal Library

Question:

A ministry offers an allowance on books and other study aides to assist its pastor in his teaching and preaching. If the pastor maintains ownership of these materials rather than the church, do these amounts become taxable to him as additional compensation?

Answer:

We believe that as long as the books and other similar supplies are related to his ministry rather than for his personal recreation, they are not taxable and he may maintain ownership without tax consequences. Presumably he and the congregation have gained the ministry benefit for which they were purchased. On the other hand, if he were to purchase books for recreation purposes (i.e., hobbies such as hunting, exercising, etc.), we would advise him to not use the church's reimbursement account. 

It is important to understand the presumption that the ministry-related books are expendable supplies incurred in support of employee activity and have negligible or reduced value in used condition. Additionally, it is imp…

Pastors Hit by New Tax Law: Wait—Maybe Not So Much!

Question:

A pastor no longer gets a benefit from writing off his unreimbursed ministry expenses. True?

Answer:

NOT TRUE! The most valuable tax benefit for pastors who don’t get fully reimbursed for their ministry expenses by their church or Christian ministry IS STILL AVAILABLE.
TRUE … The Tax Cuts and Jobs Act (TCJA) enacted in December 2017 jettisoned the itemized deduction for unreimbursed employee business expenses. But, based on our experience serving more than 100 ministers, missionaries and ministry workers annually, the TCJA did not take away the most valuable tax benefit of writing off unreimbursed ministry expenses.
Ministers are considered “dual status employees.” This means, among other factors, that most pay their own social security and Medicare taxes—a tax rate of 15.3%. Non-minister employees typically have only 7.65% withheld from their paychecks, while another 7.65% is contributed by their employers.
As we suspected when the TCJA was enacted, and now confirmed in 2018…

Form 1099-MISC Failure to File Penalties Update For Churches and Christian Ministries

Question:

What are the consequences for a church or Christian ministry failing to file a required Form 1099-MISC?
Answer:
An organization that fails to file a Form 1099-MISC as required by the IRS and cannot show reasonable cause may be subject to severe financial penalties, as outlined in the IRS instructions (Section O. Penalties) for the form: $50 per information return if you correctly file within 30 days; maximum penalty $547,000 per year ($191,000 for small businesses)$100 per information return if you file correctly more than 30 days after the due date but by August 1; maximum penalty $1,641,000 per year ($547,000 for small businesses)$270 per information return if you file after August 1 or you do not file required information returns; maximum penalty $3,282,500 per year ($1,094,000 for small businesses)Based on these penalties, churches should be mindful of the filing requirements. 
The most common expenditures that churches make subject to Form 1099-MISC …

Pastor's Mid-year Resignation Effect on his Annual Housing Allowance

Question:
Every December, a church designates its pastor's next year's housing allowance. Its pastor resigned during the year to pursue other employment. How should his annual designated housing allowance be assigned to part-year compensation?
Answer:
To our knowledge, there is no specific guidance available in IRS regulations or rulings or in court case records to authoritatively clarify this reporting. It seems appropriate, however, that the annual housing allowance should simply be prorated over the time he was employed by the church. This situation does demonstrate the potential wisdom of documenting housing allowance as a monthly amount since mid-year turnover in the office of a pastor is not an uncommon event.
A pastor contemplating an earlier departure may wish to declare (or request) in advance that his housing allowance be increased immediately for the remainder of his service.
The minister's church or other qualified organization must designate the house allowance pur…