August 24, 2009

Employee Business Expense Reimbursements--Taxable?

Question:

A church has a policy that its pastors who accompany short-term missions trips by its members will be provided 100 percent of their travel expenses out of church funds. Are these payments reportable as taxable income to the minister?

Answer:

Travel and other ordinary and necessary expenses paid on behalf of an employee to conduct his or her employer's business are not considered taxable income to the employee (IRS Publication 463). This rule applies to ministers traveling on missions trips sponsored by a church.

If the employee is provided an advance of these funds, then the employee must comply with IRS substantiation requirements (Pub. 463 (2/4/2009), page 29), the most pertinent stipulation being that adequate documentation must be provided to the employer by the employee within 60 days of using advanced funds for business purposes.

August 23, 2009

Ministry Organizations Getting Started

Question:

I want to create a ministry organization (other than a church). What kind of license would I need if its a ministry? What kind of tax ID do I need?

Answer:

Generally, it's not so much a matter of licenses (although local zoning and building codes must be followed).

A ministry will need a federal employer's identification number even if it employs no workers because opening a bank account will likely require one. Form SS-4 is used for this purpose.

The bigger issue is the 26-page Form 1023--Application for Recognition of Exemption. Its completion is necessary to receive an IRS Determination Letter that acknowledges the organization's eligibility to receive charitable (deductible) contributions and to exclude its exempt revenues from taxation.

August 20, 2009

IRS Definition of "Minister"

Question:

What are the official guidelines for who qualifies as "clergy" for tax purposes?

Answer:

IRS Publication 517 defines ministers as follows:

"Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. They are given the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination.

"If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister for social security purposes."

August 13, 2009

Churches Recording Depreciation

Question:

Should our church record depreciation on its fixed asset purchases? We have been advised to do so in order to remain compliant with Generally Accepted Accounting Principles (GAAP). We see the benefit of having a record of our fixed assets and their values (original values or replacement cost), but don't see much value at all in recording depreciation.

Our annual budget is around $350,000. We have approximately 30 families and 150 people in regular attendance.

Answer:

In order to provide users of financial statements a GAAP presentation, building, equipment and other long-lived asset purchases must not be recorded as expenditures in the year of purchase. Rather, their costs are allocated to expenses over the years of their useful lives. Accountants call this allocation process depreciation. Some churches are required to present GAAP reports for purposes of bank financing or donor expectations. Generally, this is limited to ministries larger than the one cited in the above question.

I have found that most members of a congregation better understand reports presented on a cash or modified cash basis. For financial statements reported on a cash basis, church members should be able to clearly see that the beginning of year cash balance, plus total receipts, less total disbursements, equals end of year cash. This means that all receipts, even loan proceeds, show up as receipts on a Statement of Receipts and Disbursements (note, not an income / profit or loss statement). All disbursements, including purchase of long-lived assets and principal payments on debt, are reported on this Statement as well.

Statements that use a modified cash basis generally include assets and debts that are current in nature. For example, expenses are reported on the Statement of Receipts and Disbursements even though they are paid a few days after the reporting period is over (e.g. the December utility bill that gets paid in January, after the budget year is over, shows up in December disbursements).

One caveat. I believe that all ministries should employ the use of a balance sheet beyond simple reporting of a cash balance. The reason? Designated gifts. A cash-basis church that never receives designated gifts will present a balance sheet with cash, no liabilities, and an amount equal to the cash balance in its equity section (more appropriately called the Fund Balance section).

But most churches do receive designated gifts and do not spend 100 percent of these gifts before their budget years are over. These unspent amounts will be forgotten without one key modification to the balance sheet. Since I know a lot of churches use QuickBooks, I'll explain my common suggestion using its features.

When a designated gift is received, the Record Deposit window must include a Split entry. General offerings should be posted to an Income account type. But the designated portion of the total deposit should be posted to an Equity account type. QuickBooks will "remember" this contribution and not close it out to zero at the end of the year.

When a check is written (Write Checks window) to spend monies received from donors who put these stipulations on their gifts, then the check must be posted to the Equity account type that was established when the gift was deposited.

One additional benefit of this technique for designated gifts received and disbursed: the church's general fund budget receipts and disbursements are not inflated by this non-budget activity.

August 10, 2009

Benevolent Gifts to Employees (Emergency or Not?)

Question:

If a church issues benevolence assistance for an employee of the church is this considered taxable income to that employee? Additionally is the church required to pay the taxes on this benevolence assistance? The payment would not be issued directly to the employee but rather to a vendor on his/her behalf.

Answer:

Generally, gifts to an employee by an employer are taxable to an employee (reportable as such on Form W-2) and subject to the same employer taxes (i.e., matching FICA tax of 7.65 percent) that any other compensation entails. This is true regardless whether the payment is made directly to the employee or to another payee on the employee's behalf.

However, employees are also members of local congregations and ocassionally have emergency issues that a benevolent fund might respond to just as it would to any other recipient. These benevolent gifts are generally irregular and responsive to uniquely identified needs (e.g. a doctor's bill, a utility payment, or a plane ticket to attend a funeral). This is probably the rare exception to taxability of a payment from a church fund to a church employee that could avoid taxation.

On the other hand, if the payments are regular and intended to supplement an otherwise below market rate of compensation, it is my judgment that the regular payments on behalf of such an employee would certainly be taxable to the employee and subject to employer payroll taxes.