November 24, 2008

Designated Contributions Held in Trust

Question:

A congregation is raising money for building improvements, receiving gifts designated for that sole purpose. Is it necessary to hold those gifts in a separate bank account or is it permissible to hold the funds in the church's general checking or savings account and otherwise account for it in its records?

Answer:

Churches typically receive both general and designated gifts. A third category of gifts--called Permanently Restricted by accountants--is rarely received by churches.

It is not required that these funds be segregated from other cash accounts as long as proper accounting is maintained. Many churches have multiple designated accounts. Maintaining separate bank accounts for each is rarely necessary or even advisable.

If general and designated funds are commingled, the church may wish to establish a reasonable method for allocating any interest or other earnings to unexpended designated fund balances.

Extreme care must be taken to avoid using designated gifts for purchases other than those specified by donors. Some ministries have shown very poor stewardship by overspending their general funds and, effectively, borrowing from designated gift funds with little hope of restoring the cash accounts to their proper level. This obviously discourages donors but may also draw attention from State authorities if a donor files a grievance.

November 23, 2008

Gifts to Church Employees

Question:

Can a congregation give gifts to its employees on a tax-free basis?

Answer:

Yes and no...

The Rest of the Story:

Internal Revenue Code Section 102(c)(1) prohibits the exclusion "from gross income any amount transferred by or for an employer to, or for the benefit of, an employee." However, IRC Section 132(e) offers an exception for "de minimis fringe" amounts, defined as "any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer's employees) so small as to make accounting for it unreasonable or administratively impracticable."

A Reveune Ruling by the IRS clarified this for holiday gifts: Gifts of minimal value that are provided by an employer to its employees may be excluded from the employees' incomes if the gifts have little value and are not readily convertible into cash. "The value of a turkey, ham, or other item of merchandise of similar nominal value, distributed by an employer to an employee at Christmas, or a comparable holiday, as part of a general distribution to employees engaged in the business of the employer as a means of promoting their good will, does not constitute wages" (Rev. Rul 59-58).

November 05, 2008

Retired Minister-Taxable Income

Question:

A retiring minister receives a severance package from the church, and the congregation collects a love offering as additional financial assistance. Are the payments taxable?

Answer:

Yes, the income will be characterized in the same manner as his standard compensation during his tenure as a minister. This is also true of deferred compensation plans under which the minister continues to receive support for a period of time after retirement. He should consider requesting that an appropriate portion be designated as housing allowance. Alternatively, he may wish to request withholding ("elective deferral") into a 403(b) retirement plan.

Question:

Several members pay out-of-pocket costs to provide home repairs on his house. Are their payments for these materials tax deductible as contributions? Are the payments for lumber, etc. taxable to the minister?

Answer:

Since the costs paid and benefits received are related to a personal act between a benevolent donor and a donee and not related to an employer-employee relationship, the amounts are not considered compensation for the minister's services. They are neither deductible by the members, nor taxable to the minister.

Question:

The church congregation announces the establishment of an effort to collect contributions in order to fund home repairs to the retiring minister's home. The monies once collected are used to pay for lumber and other materials. Are the contributions deductible by the members and taxable to the minister?

Answer:

An examination of IRS rulings and court case findings offers some fairly consistent guidance here, but there may be rare exceptions. Generally, the situation described here should result in charitable donation classification by the church with tax-deductible reporting made to its members and taxable income reportable to the minister on Form W-2.

Some limited evidence can be found for treating the payments out of the church's benevolence fund in support of a retired minister who has remained an active church member as non-taxable gifts, just as they would be treated for any non-employee receiving assistance from the church. In the case of a retired minister, it will be necessary to justify (if called upon to do so) that no services were rendered by the minister in exchange for the benevolent act of the congregation. It may be necessary to demonstrate by virtue of the passage of time (it's difficult to be more specific than this) that the payments were not associated with his employment.