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Showing posts from January, 2010

Missions Trip Giving

Question:

When someone gives to a general fund for a missions trip it is tax deductible giving. If someone gives to a specific person for a missions trip, is it tax deductible giving? Can someone going on a missions trip write off the expense of the trip as tax deductible giving?

Answer:

First, let's review some material that I included in an October 17, 2009, posting. IRS Publication 526 addresses "Out-of-Pocket Expenses in Giving Services" and travel costs. The Publication offers several principles:

"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 because of the services you gave, and 4) not personal, living, or family expenses."

Car expenses can be deducted at 14 cents per mile (2010 rate) for documented charitable miles. Regar…

Form 1099-MISC for Benevolent Gifts?

Question:

Does a church need to issue a Form 1099-MISC for the rent and medical bill payments it disbursed from its benevolence fund? A church may issue checks directly to the landlords and medical facilities of the individuals in its community who seek help during these difficult financial times. This gives it assurance that the money is being used for rent, medical bills, food, utilities, etc. as intended.

Answer:

The instructions to Form 1099-MISC require non-profit organizations to report "only when payments are made in the course of your trade or business." These payments are not made in exchange for either 1) services provided by the recipient of benevolent gifts, or 2) services provided to the non-profit organization (the church). While I discovered no direct advice from the IRS on this subject, it seems reasonable that no Form 1099-MISC requirement applies. The benevolent payments are not "in the course of your trade or business." Further, had the individuals …

Form 1099-MISC for Missionaries Supported by Local Churches

Question:

Does a church need to issue Forms 1099-MISC to all the missionaries it supports?

Answer:

Missionary support will not require issuance of Form 1099-MISC when the support is sent to his or her mission agency. That agency is considered the employer of the missionary and will issue the proper forms. Only when the church acts as a missionary's agency, sending payments directly to the individual, will the church need to issue an information return and then only when the annual payments exceed $600. The church should request Form W-9 be completed by the missionary in these rare (my experience) occasions. Form W-9 is available on the IRS website.

Churches Issuing Form 1099-MISC to Landlords

Question:

A church rents its facility from a individual. Does it need to issue a Form 1099-MISC to its landlord?

Answer:

Yes

The instructions for Form 1099-MISC require that rent payments be reported in Box 1. Only "trades or businesses need to report rent payments. Personal payments are not reportable. ... Nonprofit organizations are considered to be engaged in a trade or business and are subject to these reporting requirements."

The instructions offer the following exceptions that may apply to churches in some situations. "Some payments are not required to be reported on Form 1099-MISC, although they may be taxable to the recipient. Payments for which a Form 1099-MISC is not required include:

Generally, payments to a corporation
Payments for merchandise, telegrams, telephone, freight, storage, and similar items
Payments of rent to real estate agents"

Pennsylvania W-2 with 100% Housing

Question:

A pastor receives as his only compensation a cash housing allowance. However, Pennsylvania state income tax statutes do not recognize housing allowances (but PA local tax statutes do!). The church's treasurer registered to file the W-2's online using the Social Security Administration (SSA) website but cannot proceed with a zero in Box 1 (taxable compensation for federal income tax purposes). Can the treasurer file online when Box 1 is zero?

Answer:

Wonderful Pennsylvania exceptions! Few states top PA in complexity for ministers (maybe OH and CA come close). I have not tried it using the SSA site, but some softwares manage to override this problem by placing $.01 in Box 1. ... my one cent worth!

Christian School Teachers as Ministers

Question:

Do the teachers of a Christian school qualify for a housing/parsonage allowance under section 107 of the IRS code? If so, do teachers have the option to elect whether they are treated as ministers, hence receiving a housing allowance and being reclassified as self employed?

Answer:

Several resources can help to answer these questions including the IRS Minister Audit Technique Guide. Cited within the Guide is Treas. Reg. § 1.107-1(a) which "provides examples of specific services considered duties of a minister, including the following.
- Performance of sacerdotal functions
- Conduct of religious worship
- Administration and maintenance of religious organizations and their integral agencies
- Performance of teaching and administrative duties at theological seminaries"

Since I have been connected with a Baptist college for 21 years, I have studied this topic extensively. There are several issues that relate to teachers as ministers that I'll not re-study to prepare this a…

Church Support Directly to Foreign Minister

Question:

When should a Form W-8 be used rather than a Form W-9?

The background is that a church sends funds directly to a local pastor in a third world country. Should there be withholding taxes subtracted from these payments by the church? Also, what are the U.S. tax consequences for both the local recipient and also the U.S. church providing this support?

Answer:

To review, a Form W-9 requests the tax identification number from a payee who will likely be issued a Form 1099-MISC as an independent contractor of an organization. A Form W-8 (in its various forms) relates to the determination whether a US organization must withhold US federal income tax from a foreign individual receiving compensation from a US organization for services provided within that foreign country.

I did some research into this one since I've not run in to it before, but I will not end up being able to provide Internal Revenue Code sections on this one (just some wise advice from a seasoned veteran of foreign mi…

Time Limits on Refund SE Tax After Exemption Gained

Question:

Does the IRS have time limits between when a minister was licensed and when he can begin applying an IRS-approved exemption from self-employment tax?

Answer:

The instructions to Form 4361, Application for Exemption from SE Tax for Use by Ministers, state the following:

"When to file. File Form 4361 by the due date, including extensions, of your tax return for the 2nd tax year in which you had at least $400 of net earnings from self-employment, any of which came from services performed as a minister, member of a religious order, or Christian Science practitioner."

It continues:

"Effective date of exemption. An exemption from self-employment tax is effective for all tax years ending after 1967 in which you have net self-employment earnings of $400 or more, if you receive any of it from ministerial services."

Be advised that, generally, you have until three years from the due date of a return to file an amendment (IRS Form 1040X) to receive a refund. For example, a…

Minister's Only Compensation--Living in the Parsonage

Question:

A youth minister (non-ordained) is being compensated solely by housing in the parsonage. Is the youth minister taxed on the value of living in the parsonage?

Answer:

I'm assuming that even though he's not ordained, he's still a minister as defined by the IRS. The posting right before this one somewhat defined a minister. It says in part, "...licensed, ordained, performing what the IRS defines as "sacerdotal duties" (baptisms, communion, weddings, funerals), or conducting religious worship ... (Source: IRS Minister Audit Technique Guide, April 2009).

This is important. If he is not a minister, the value of the employer provided housing would likely be taxable for income tax purposes as well as for social security and Medicare purposes. Exception: "housing for the convenience of the employer" but I won't get into that one in this posting.

Back to the question, the minister is not subject to income tax on the fair rental value of the parsona…

Local Church Serving as a Mission Agency

Question:

A church set up a missions fund that will go to support a couple doing missions work in a foreign country. It will treat the couple as employees on the church's payroll. It wants to set up a reimbursable expense account to help reduce their taxable income. The big question is what is reimbursable? In particular, are their rent and utilities considered a business expense? They are not ordained at this time and will not receive a housing allowance.

Answer:

As employees of the church, reimbursements the couple receives for employee business expenses are not taxable. Mission agencies typically treat missionaries as their employees, require meticulous record keeping, and, then, use funds in their accounts to first reimburse (or pay directly) these expenses. IRS Publication 463--Travel, Entertainment, Gift, and Car Expenses--may be particularly helpful to identify which expenses can be reimbursed tax-free. However, other legitimate ministry expenses (literature, meeting costs, lo…

"Tax Home" Clarification

Question:

A missionary to a foreign country has received some contradictory advice: "When we started our deputation, I was told by Tax Preparer 1 that since we did not have a 'tax home' we could not claim travel expenses as deductions." Tax Preparer 2 advised the missionary "that since s/he was self employed, s/he did not need a tax home for travel deductions." Could you please clarify this confusion or provide a list of resources where an answer could be obtained?

Answer:

First, let me suggest a couple of helpful resources: 1) IRS Publication 463, and, perhaps less so, 2) type "Tax home" in the search window of this blog.

While a minister is self-employed for purposes of self-employment (SE) tax, this status has no relevance to the determination of deductibility of travel expenses. Tax Preparer 2 is incorrect. Publication 463: "Travel expenses defined. For tax purposes travel expenses are the ordinary and necessary expenses of traveling away fro…