Skip to main content

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.

Comments

  1. I would love to see a copy of the presentation you give to college level accounting students because I am part of that category and we never really cover these topics in class.

    ReplyDelete
  2. This presentation is now available on our main website: http://www.ministrycpa.com/?q=alldownloads

    ReplyDelete

Post a Comment

Popular posts from this blog

Church Car Purchase for Pastor

Question: A church would like to purchase a car for the pastor's use. What is the best method to accomplish this goal? Should the car be titled in the pastor's name? What will be the tax consequences of this arrangement? Answer: The church has two main alternatives for this purchase:  Title the car in the pastor's name and reimburse him for business expenses Title it in the church's name and treat personal use as taxable compensation There are fewer immediate tax consequences for the latter. Since both are viable options, we will discuss both situations in this post. If the church chooses to give the car to the pastor and register it in his name, he is free to use it for whatever personal use he desires with no tax consequences. However, the fair value of the car is taxable as compensation at the time it is given to the pastor. Internal Revenue Code section 102(c) clearly states that gifts given to employees by their employers are taxable compensation. The...

Can Form 4361 be filed after the deadline?

Question:   Is it possible to opt out of Social Security after the 2-year deadline? Answer:  Unlike other employees, a licensed or ordained minister has the option to opt out of Social Security and Medicare (FICA). If a minister wants to opt out they must file Form 4361 by the tax deadline including extension, in the second year in which they have received ministerial income of $400 or more. This election is final, and the minister cannot opt back into FICA taxes.  At MinistryCPA, we have received questions from ministers who have exceeded the two year deadline and desire to opt-out. There have been several court cases which provide guidance in answering this question. Some have argued that the minister was unaware of the deadline, had mistakenly believed they had filed a timely election, were given incorrect advice by an IRS employee, or their opposition to participate in Social Security and Medicare did not arise until after the 2-year deadline had passed. In each of th...

Form 941 or 944 - Which Should a Church Use for Payroll Reporting?

Question:   Are churches required to file a Form 944 annually to report their employees' earnings and tax-withholdings? A quarterly Form 941 (rather than an annual Form 944) is required of some employers. Which IRS form, if any, should be filed? Answer: According to IRS Section 1402(c) and 3121(c), ministers are not subject to mandatory income tax withholding. Unless one or more ministerial employees request non-mandatory withholding, church employers with only ministerial employees do not need to file Form 941 or Form 944.  The IRS  Ministers Audit Techniques Guide  explains in further detail a minister's treatments for Social Security, Medicare tax, and income tax withholding.   Form 941 or 944 must be filed when non-ministerial employees are compensated or when ministers request withholding. When can a church file the annual Form 944 rather than filing Form 941 each quarter? The IRS may permit the annual filing of Form 944 for employers wh...