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Showing posts from October, 2009

Retired Minister Continued Support from His Congregation

Question:

Our pastor is retiring from our assembly in 2010. He will be remaining with our congregation as a member and will have no further duties or responsibilities with our church. He has been our shepherd for many years. If the church were to supplement his social security income with a monthly "benevolence" check would this qualify as non-taxable benevolence?

Answer:

Rare exceptions to the taxability of gifts to employees (current or former) have been made by the IRS (Private Letter Rulings, I believe; but I am going on memory right now) in cases of former ministers with medical or other needs that typically merit benevolence. In the case here, it will likely appear to the IRS and other objective parties that the church is now aiding a former employee who received inadequate compensation during his tenure (at least inadequate in the sense that he did not accumulate funds for post-retirement living). This compensation, while appreciated by the minister, will be taxable.

How…

Benevolent Gift Rules Review

Question:

My church regularly gives financial help to individuals in need. Should the individual receiving financial help/charity from the church be issued any kind of Form 1099 from the church?

Answer:

IRS Publication 525 states that gifts to individuals not in the employ of the donor are non-taxable. This is true regardless whether the gifts are periodic or regular as long as no services are required (past, present or future) to receive the benevolence. I recommend that viewers of this blog type "Benevolence" in the above search window for much more on this subject.

Question:

Donations have been made to our church, and the donors requested that certain individuals then be given the same amount in charity from the church due to a perceived need (specifically, for people who have lost their jobs, but the specific individuals were named by the donors). The church told the donors that it would assume complete legal control over the donated funds, but the church has, in fact, been g…

Missions Work: "Business" or "Hobby"

Question:

A missionary receives little support and uses a lot of her own funds to cover her expenses. Can the expenses paid out of her personal funds be deducted as a business expense on Schedule C as well? If so, she will always have a substantial loss, as she funds the majority of her work with her personal funds.

Answer:

Business expenses can be deducted even if they lead to a loss in a particular year. But if an activity is classified as a hobby (not as a business), expenses can only be deducted to the extent of income. In other words, a business loss on Schedule C cannot be created.

According to IRS Publication 535 and related instructions on its website,

"Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.

"In order to make this determination, taxpayers should consider the following factors:
Does the time and effort put into the activity indicate an intention to make a profit?
Does the taxpayer depend on incom…

Travel Expenses for Ministry Trips

Question:

A family works with a ministry that serves orphans in several foreign countries. Many individuals and families travel to fulfill short-term missions projects each year. Parents typically bring their children who help with painting, cleaning, etc. There is no element of vacation associated with the trip. Can expenses for the family trip be deducted if paid directly by the family (airfare, etc) or does the ministry need to pay these expenses directly and be reimbursed in essence by the family to be deductible?

Answer:

IRS Publication 526 addresses "Out-of-Pocket Expenses in Giving Services" and travel costs.

First, let's consider four principles that the Publication highlights:

"Although you cannot deduct the value of your services given to a qualified organization, you may be able to deduct some amounts you pay in giving services to a qualified organization. The amounts must be 1) unreimbursed, 2) directly connected with the services, 3) expenses you had only be…

Itinerant Minister Housing Allowance Strategies

Question:

If an itinerant minister declared at the beginning of the year that the first x amount of dollars received would be considered his housing allowance, would that be an unreasonable interpretation of tax law concerning ministries?

Answer:

A housing allowance must be designated by action of the payer(s), not by declaration by the recipient, so I don’t believe the above strategy will work.

I recommend that a church providing an honorarium to an itinerant minister provide a written and signed breakdown of its remuneration including the portion designated as housing and any portion paid as reimbursement for properly documented travel or other costs. The minister may wish to provide guidance to the ministry as to the percentage and method for this statement.

Housing Allowance for Itinerant Ministers

Question:

An itinerant minister utilizes Schedule C to report his honoraria. No portion of this income to this point has been designated as housing allowance. As an itinerant minister, can he deduct all reasonable housing expenditures without having them designated by a church or other qualifying organization?

Answer:

The April 2009 Minister Audit Technique Guide published on the IRS website offers guidance here. The housing allowance must be officially designated before the compensation is received. While the Guide does not directly address the case of itinerant minister, it seems that an official designation of one's honorarium before it is disbursed to the minister will qualify. Accordingly, churches issuing Form 1099-MISC could properly exclude that portion from the Non-Employee Compensation box. I do recommend that such churches provide the itinerant minister a statement of the housing allowance paid to him as part of his honorarium since he must follow the Clergy Housing Allowa…

Education Costs to Become a Minister

Question:

What advice can you give a newly ordained minister on the deductibility of expenses related to training materials, tuition, books and apartment rent incurred during the process of becoming a licensed minister?

Answer:

IRS Publication 529 communicates information regarding the deductibility of "Work-Related Education." These deductions are Miscellaneous Itemized Deductions on Schedule A. It says,

"You can deduct expenses you have for education, even if the education may lead to a degree, if the education meets at least one of the following two tests.
It maintains or improves skills required in your present work.It is required by your employer or the law to keep your salary, status, or job, and the requirement serves a business purpose of your employer. "You cannot deduct expenses you have for education, even though one or both of the preceding tests are met, if the education:
Is needed to meet the minimum educational requirements to qualify you in your trade or …

Missionary Meal Expenses--Deductible?

Question:

"A missionary in Mozambique does not keep records of her actual meal expenses as she was told that there was a basic “formula” used in deducting food expenses. Can you provide any information regarding this “formula” for calculating food expenses?"

Answer:

First, most meals for missionaries are not deductible. According to IRS Publication 463, meals are only deductible when it is necessary for you to stop for substantial sleep or rest to properly perform your duties while traveling away from home on business. Business-related entertainment meals are also deductible. Since a missionary's home is his or her place of ministry in the foreign country, he or she is rarely traveling away from home on business. The exception may be short ministry-related trips within the country.

For these cases, Publication 463 describes a standard meal allowance. The IRS says, "If you use the standard meal allowance, you still must keep records to prove the time, place, and business…

Private Inurement

Question:

A church houses a Bible school on its property that had been started at one time by a church employee as a for profit, sole-proprietorship. Church staff state that "the church is non-profit and the school is for profit." Does the church need to prepare tax returns each year for the school? Can it merge the school into the church after-the-fact so it won't be a sole proprietorship any more?

Answer:

There's a lot going on in these questions. As I try to be in all most posts, I'll try to be brief yet helpful. Some of the issues will undoubtedly require consultation with an attorney who knows state law applicable to the church.

Certainly, a church can have ministry related auxiliary activities such as a Bible school that will be tax exempt. But the church must be the "owner" of the venture.

For now, the church needs to very careful about having its property used by an employee to operate his own for-profit business, especially if he’s not paying a fai…

Nonaccountable Plans for Missionaries

Question:

How should missionaries report their "working fund" as opposed to salary. Do they keep records themselves in case asked by the IRS? Are these funds reported by the supporting congregation/mission organization and then deducted as business expenses? Who is able to decide what constitutes a "working fund" expense as opposed to a salary item?

Answer:

Although I'm not familiar with the term "working fund" I believe it is a sum of money sent to the missionary for ministry use (not personal use) without documentation expectations. The IRS calls these arrangements "nonaccountable plans" (see IRS Publication 15 for a brief definition, including "accountable" plan rules).

The quick answer to the questions posted is that the full amount received into a missionary's nonaccountable working fund is treated the same as his standard support. If the mission agency is treating the missionary as an employee (the standard method), then thes…

Minister Buys Business Vehicle with Church's Help

Great Question:

A church wishes to buy its pastor a new vehicle and has the cash to pay for it outright. Possible tax strategies:

1 – Church owns the vehicle and the pastor keeps log of business versus personal use; the value of his use is included on his Form W-2. Negative: this also keeps the insurance policy in the church’s name which somewhat exposes the church.

2 – Church pays for the vehicle and titles it to the pastor (15% federal income, 5.75% state income plus 15.3% self-employment (SE) taxes paid on the vehicle value; the taxes could be paid partially by the church by grossing up the pastor’s salary). Negative: all income coming into play in one year and the possibility of pushing the pastor into a higher bracket.

3 – Pastor owns the vehicle and finances it – church pays pastor additional paycheck each month grossed up for taxes and after deductions leaves enough net pay for making payment.

"Answer" (in quotes because my response will mainly be simple comments):

1 – Thi…

Donor Records for Benevolent Gifts

Question:

A church maintains a benevolence fund to assist the needy in the church and community. Is the church required to keep a list of names of the donors (not recipients) of those funds?

Answer:

Identical to any other type of charitable contribution, in order for donors to receive a year-end statement of their giving benevolence fund records must also be kept. I recommend that these gifts be recorded in an identical manner as other contributions.