February 27, 2010

Departing Pastor Gift (or is it Compensation?)

Question:

I have a question concerning the taxability of a “love gift” given to a departing pastor after he has left the church. We have been told by our convention that if the church follows certain steps, a gift made after the minister’s final day of payment for services will not be taxable to the minister.

The requirements include being voted on by the church, given after the minister’s final day of payment and completely voluntary on the part of the membership and including information in the churches minutes.

Answer:

The IRS "Minister Audit Technique Guide" available at the following link is particularly helpful in answering questions such as these:

Minister Audit Technique Guide

I cite here a few sections from the guide, but more information is available there--particularly in the section with the heading, "Gift or Compensation for Services."

"There are numerous court cases that ruled the organized authorization of funds to be paid to a retired minister at or near the time of retirement were gifts and not compensation for past services. Rev. Rul. 55-422, 1955-1 C.B. 14, discusses the fact pattern of those cases which would render the payments as gifts and not compensation.

"The Tax Court had ruled in Potito v. Commissioner, T.C. Memo 1975-187, aff'd 534 F2d 49 (5th Cir. 1976), that the value of a boat, motor and boat trailer was included in gross income as payment for services. The taxpayer, a minister, had not produced any evidence regarding the intention of the donors that the transfer of the property was out of 'detached and disinterested generosity.'"

In the contemplation of these issues, I encourage reference to my October 28, 2009, blog post as well:

Retired Minister Continued Support from His Congregation

February 24, 2010

Housing Allowance Expenses Paid Directly by Church

Question:

Can a pastor's house payment and other expenses equal to his housing allowance be paid directly from the church bank account?

Answer:

Technically, the answer is yes. I know of no ministry that does this and I strongly recommend against it. Most church treasurers are busy enough without processing all the pastor's housing expenses. One check per pay period can be issued to the pastor to cover his cash compensation, plus his housing allowance.

Question:

If a pastor has opted out of social security does he have to show housing on the Form W-2?

Answer:

First, he does not need to show it on Form W-2 because it is the church that prepares the form, not the pastor.

Regardless whether the pastor has opted out of social security, I strongly recommend that the church report the housing amount in Box 14 as a memo item. While it is not technically required, it reports to the pastor the amount that he must account for. Any excess designated amount above his actual expenses must be claimed as taxable income (Clergy Housing Allowance Clarification Act of 2002).

February 18, 2010

Sabbatical Trip Paid by a Church

Question:

A pastor at a church is taking a 3-month sabbatical trip for "rest and renewal." The expenses for the trip are being paid by the church. Does the IRS require that these expenses be considered income to the pastor for Form W-2 purposes?

Answer:

IRS Publication 463 is helpful here. The taxation issue relates substantially to whether the trip is for "bona fide business (ministry) purposes" or for personal purposes. For example, a trip to visit ministries supported by a church for purposes of encouragement and accountability in the work of its people, and for the purpose of reporting back to the church are clearly business purposes.

Another question implied by the Publication relates to whether a pastor "would otherwise be allowed to deduct the travel expenses" had he paid for the trip himself (as an employee of the church).

More...
"You can deduct all of your travel expenses if your trip was entirely business related. If your trip was primarily for business and, while at your business destination, you extended your stay for a vacation, made a personal side trip, or had other personal activities, you can deduct your business-related travel expenses. These expenses include the travel costs of getting to and from your business destination and any business-related expenses at your business destination.

"If your trip was primarily for personal reasons, such as a vacation, the entire cost of the trip is a nondeductible personal expense. However, you can deduct any expenses you have while at your destination that are directly related to your business."

Travel outside the U.S. is also addressed in the Publication, requiring careful consideration of matters not addressed in this posting.

Accordingly, if a church pays for an entire trip that has both business and personal components, an accurate allocation will be required before Form W-2 can be prepared. The personal costs must be reported as taxable income.

February 09, 2010

Church Use of GAAP Accounting

Question:

In response to your February 24, 2009, blog posting that suggests, "Unless a church wishes to report its financial results using full GAAP accounting, I recommend recording equipment purchases as expenses and omitting any depreciation concern," I am afraid the church will not have "formal control" over the assets nor a good record (or evidence) of its possession (other than the invoices) when unexpected events occur, say if it is stolen. Is it wise to ignore Generally Accepted Accounting Principles?

Answer:

You may wish to review the full blog posting, but the question allows me to address some important points. Each church should be able to identify the property it owns. Catastrophic events such as fire and vandalism do befall churches. It may be wise to video church property on a periodic basis for this very purpose. Of course, off-site storage of equipment lists will aid greatly in documenting a loss.

My point about using a strict cash basis of accounting does not address this need. My suggestion to use this very simple method relates 1) to the lack of trained accounting personnel in many small churches (including provision for turnover in often voluntary positions) and 2) to the lack of understanding of more complex accounting reports by the common layperson. The use of the cash basis does not excuse these churches from maintaining proper fund accounting for designated gifts.

Churches that have the ability to employ trained personnel should use GAAP. These same personnel will also have the understanding necessary to communicate financial results to others. Several of the Christian organizations that I serve maintain their books on the accrual (GAAP) basis, but budget on the cash basis. This requires trained and experienced accounting personnel but seems to satisfy the need for GAAP accounting systems and for lay-friendly reporting of receipts and disbursements. Readers who want more information regarding these issues may request a copy of a presentation I have given to students of college-level accounting courses.

Question:

What happens to the real and personal property purchased by the church in the event of its liquidation? To whom should it be distributed?

Answer:

These are questions that the church constitution should answer in a manner consistent with local law. Most U.S. church constitutions address this contingency by granting the transfer of its assets to another church or Christian ministry that can carry out the spirit of the original church's mission.

February 05, 2010

Church Employees with No FICA Withholding

Question:

A new church treasurer takes over the "books" and notices that the church janitor and the church nursery provider have had no FICA tax withheld, yet have been issued Form W-2s with no FICA being withheld just as if they were ministers who are exempt from FICA tax. She understands that independent contractors are self-employed and have no FICA withholding, but she has not run into a situation where non-ministerial church employees have no FICA withheld. Can this possibly be right?

Answer:

According to IRS Publication 517:

"Churches and qualified church-controlled organizations (church organizations) that are opposed for religious reasons to the payment of social security and Medicare taxes can elect to exclude their employees from FICA coverage. If you are an employee of a church or church organization that makes this election and pays you $108.28 or more in wages during the tax year, you must pay SE tax on those wages.

"Churches and church organizations make this election by filing Form 8274."

So, it's possibly correct, if the church had applied for and been granted exempt status. The bummer is this: unlike the minister who may have the option to "opt out" of SE tax, non-ministerial church employees have no such option. They must pay the full 15.3 percent SE tax that is normally paid 50/50 by employer and employee.

February 04, 2010

Benevolence Distributed Directly to Recipient

Question:

A church encourages attenders to contribute to its benevolent fund to help needy individuals. Is it acceptable to make benevolent fund disbursements directly to individuals instead of, for example, issuing checks to health providers to help with extraordinary medical bills?

Answer:

First, let me encourage readers to type "benevolence" in the above search window. You'll get a number of hits for past blog postings, including important clarifications that I'll not repeat here.

It's okay to issue monetary assistance directly to a recipient who can then, for example, go to a grocery to buy food for his or her family. However, it is extremely rare for "experienced" churches and Christian ministries to do this. They wish to avoid any confusion as to how the gift should be spent. More than 20 years ago, as a deacon of my church I was part of an unfortunate experience. A family was in need. The church issued a check to the dad. The check was cashed (endorsed) at a tavern! The family's needs were not met.

Occasionally, benevolence is offered in the following manner -- "We will gladly buy you some groceries. What specifically can we purchase for your family?" -- only to have the offer rejected.

Donor Control Over Gifts to Churches

Question:

How much influence may donors exercise on the disbursement of church benevolent funds that they have contributed to?

Answer:

As members of a local church congregation, donors to benevolent funds may help to identify and encourage the church's aid of individuals in need just as those who do not contribute may. Often, donors to these type of funds are among the more sensitive to observing these needs so it is not surprising that they may be the originators of discussions by the church leadership to consider making benevolent disbursements.

Having said this, the process must be an open one. Clearly, once funds are donated they must be fully under the control of the church. The church must be very careful to avoid becoming a conduit for donor "contributions" that really satisfy their own personal obligations. For example, a donor's gift that is designated to pay her granddaughter's Bible camp admission or youth activity to visit the local amusement park is not a deductible contribution. The church may assist the grandmother in maintaining her anonymity, if that is the underlying purpose for the gift, but should not issue a receipt for tax deduction purposes.

Let's change the scenario a little bit. Imagine, instead, that the church congregation decides to establish a designated gift fund to enable children of financially challenged families to attend Bible camp. The grandmother makes a contribution to the fund. Unbeknownst to her (or at least without her direct influence), her granddaughter qualifies and receives assistance. This will not deny tax deductibility. This scenario can repeat itself in multiple situations (e.g. missions or church planting support to ministries of church members' families, scholarship funds).

Donors should not exercise control over the disbursement of these funds. Further, if the disbursements are predominately funded by a recipient's family member, even if others contribute in small amounts, the church should assure itself that the disbursements are truly reflective of church action and endorsement. Let me repeat, the church must be very careful to avoid becoming a conduit for donor "contributions" that really satisfy their own personal obligations.