January 30, 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. Regarding travel expenses specifically, Publication 526 states:

"Generally, you can claim a charitable contribution deduction for travel expenses necessarily incurred while you are away from home performing services for a charitable organization only if there is no significant element of personal pleasure, recreation, or vacation in the travel. This applies whether you pay the expenses directly or indirectly. You are paying the expenses indirectly if you make a payment to the charitable organization and the organization pays for your travel expenses.

"The deduction for travel expenses will not be denied simply because you enjoy providing services to the charitable organization. Even if you enjoy the trip, you can take a charitable contribution deduction for your travel expenses if you are on duty in a genuine and substantial sense throughout the trip. However, if you have only nominal duties, or if for significant parts of the trip you do not have any duties, you cannot deduct your travel expenses."

The Publication lists the following expenses as deductible: "Air, rail, and bus transportation; out-of-pocket expenses for your car; taxi fares or other costs of transportation between the airport or station and your hotel; lodging costs; and the cost of meals."

It seems that the only unanswered question above relates to giving toward a specific person's mission trip. As long as the gifts are disbursed by the church or Christian ministry only to cover non-personal expenses (as discussed above) and no personal benefit is received by the donor or the recipient, the contributions are deductible. Any excess donated funds cannot be given to the missions team member. They can be used for other members' expenses or future trips. I recommend that this policy be stipulated to members of the team. It is probably wise to also advise donors that all contributions once received are under the control and discretion of the church or ministry. Contributions intended for team members who must cancel their participation or who become disqualified are then redirected to other charitable purposes related to the missions trips or other activities of the ministry.

January 29, 2010

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 receiving the assistance been given the gifts and, then, made subsequent payments, no Form 1099-MISC requirement would have fallen upon them either.

January 21, 2010

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.

January 20, 2010

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"

January 19, 2010

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!

January 17, 2010

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 answer but will influence my interpretation.

First point:
Treas. Reg. § 1.1402(c)-5 requires that an individual be a “duly ordained, commissioned, or licensed minister of a church.” Unless the churches employing the Christian school teachers cited in the question are ready to recognize the call to the gospel ministry upon these individuals, they have no grounds to ordain or license them. It is not uncommon to hear of a bona fide minister leaving his typical duties (defined above) and entering Christian education. It's much less frequent to have a Christian educator announce that he is called to the gospel ministry yet remain full-time in the classroom (the circumstance implied in the Question). The Scriptural call upon a man of God is certainly not an elective activity as I understand it, so I strongly caution churches and teachers against licensing for the sake of tax avoidance.

Second point:
Again quoting the IRS Minister Audit Technique Guide: "Although a minister is considered an employee under the common law rules, payments for services as a minister are considered income from self employment pursuant to IRC §§ 1402(c ) and 3121(b)(8). A minister, unless exempt, pays social security and Medicare taxes under the Self-Employment Contributions Act (SECA) and is not subject to Federal Insurance Compensation Act (FICA) taxes or income tax withholding." A licensed or ordained minister providing services for a church school does not have an election to make related to his tax status. He is an employee, but subject to SECA taxes. His compensation is not properly categorized as FICA wages.

January 15, 2010

Non-cash Compensation and Form W-2

Question:

A church gives its pastor a vehicle. How does it report the amount it paid for the vehicle on his Form W-2?

Answer:

According to IRS Publication 15, the fair market value is includible as taxable compensation in Box 1 of Form W-2. Presumably, that amount is equal to the price the church paid for the vehicle.

January 10, 2010

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 missions). Every missionary client I've worked with who provides some level of support to local ministers within the congregations he serves does so out of his own support. At times, perhaps, a church may wish to help foreign ministers but does so under the direction of a US missionary (and sends money to him, not to the foreign individual).

I consulted a client in a third world country who has quite a bit of experience with this type of situation. He strongly recommends against the practice intimated in the question. While not wanting to be judgmental and realizing that some US missionaries may fail in their stewardship as well, he noted that the foreign individual is not typically under the same accountability level as virtually all US missionaries (to local US church, to mission board, to guests on the mission field from the local US church, etc.). Further, the church will not likely be as familiar with the local culture as a trusted missionary on the field who can monitor the situation.

Getting back to the question, if the funds are sent to the US missionary (either through his Board or directly), then the missionary must report the receipt as income, but will also likely have a corresponding deduction for ministry expense in supporting the foreign individual.

January 09, 2010

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, an individual earns $5,000 as a newly licensed minister in 2006 and, then, goes full-time in 2009, earning $50,000. He has until the due date, plus extensions, of his 2009 return to apply for exemption using Form 4361. However, the due date of his 2006 return was April 15, 2007. He has until April 15, 2010, to file for a refund of the SE tax that he paid on the $5,000 of ministerial earnings in 2006.

January 06, 2010

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 parsonage. However, he is subject to self-employment tax (Form 1040, Schedule SE).

Question:

If he is subject to SE tax is the church responsible for a paying a portion of his self-employment tax?

Answer:

He is considered self-employed and responsible for his own SE tax. Many churches choose to voluntarily help with this tax--a blessing! But this payment is considered taxable income as well. Yet, the youth minister is obviously better off for the help.

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, local transportation, etc.) may be reimbursed.

This tax-free reimbursement does not include their personal living expenses for rent, utilities, food, etc. since they will have established a tax home in the foreign country. Further, since they are not licensed, ordained, performing what the IRS defines as "sacerdotal duties" (baptisms, communion, weddings, funerals), or conducting religious worship they are not eligible for a clergy housing allowance (Source: IRS Minister Audit Technique Guide, April 2009).

The church may wish to consider whether it recognizes the call of God to the gospel ministry upon the missionary and may legitimately license him. I am not at all suggesting that licensure be taken lightly. If the couple is going to simply live in the foreign country and perform ministry, but not ministerial service, I do not recommend licensure simply to gain tax benefits. Of course, in certain "closed" countries, performing sacerdotal duties and conducting religious worship is not permitted.

Regardless whether they can be provided a clergy housing allowance, the couple's tax preparer may conclude that they are qualified for foreign income exclusion. Of course, they will want to consider whether there are any foreign country tax issues to deal with.

Question:

The church did not realize it would have to set up employees and began receiving contributions for the couple. The couple has been in the foreign country now for two months. Because they will not be set up as employees until 2010, they have yet to receive compensation from the church. They do have business expenses from 2009 for which they would like to be reimbursed. Can they be reimbursed in 2010 for these expenses?

Answer:

With proper documentation, they can be reimbursed now. They should not attempt to deduct these expenses on their 2009 return since they will be reimbursed in 2010.

January 03, 2010

"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 from home for your business, profession, or job" (emphasis added). Whether traveling for a "business" as a self-employed individual or for a "job" as an employee s/he must be traveling "away from home."

Whether Tax Preparer 1 is correct depends on the facts and circumstances of a missionary's deputation situation. (Once a missionary is "on the field" his tax home is most likely his personal foreign residence or his "mission station," if he has one.)

Once again, Publication 463 is helpful: "As an itinerant, you cannot claim a travel expense deduction because you are never considered to be traveling away from home." I run into this concern most often with my itinerant evangelist clients. They tend to own no permanent residence. Rather, they purchase a travel trailer and move from location to location. Their meals, for example, cooked in their own travel trailer are not considered travel expenses since they are not "away from home." A missionary on deputation using the same accommodations as an itinerant evangelist will not be able to deduct his travel expenses (the Publication provides a list of these expenses).

However, as is the experience of all of my missionary clients, during deputation they establish a home base from which they conducted their "business" of raising support. It may be in a church "missionary house" or in a home they own or rent. But they return there between trips. This becomes their "tax home" and travel costs while out-of-town, overnight are deductible. Generally, trips they take within a day (and return home at night) offer only car expense write-offs.