December 29, 2010

News You (Individuals) Can Use (and that we may use to serve our clients better)

1. Employees get a 2% raise with their first 2011 payroll checks. The Tax Relief Act of 2010 reduces the employee-share of the FICA tax by 2%

2. Provisions set to expire on December 31, 2010, related to sales tax, educator, tuition, contributions, mortgage insurance premiums, and student loan interest deductions, and some related to the Earned Income and Child Tax Credits were extended by the Tax Relief Act. An energy credit for individuals was also reinstated, but at a lower rate.

3. Updated mileage rate deductions for 2011: business-51 cents/mile; charitable-14 cents/mile; moving and medical-19 cents/mile.

4. While it received a lot of negative press, the Health Care Reform Act of 2010 contained provisions that may benefit individuals including tax credits and increased benefits for employees' adult children.

5. The Small Business Jobs Act of 2010 increased some business write-offs and created additional Roth Account conversion opportunities for individuals.

Review of Year-End Charitable Giving Reports by Churches

Questions:

What do we do with post-dated checks or checks that arrive in the offering box in January with a December date on them? If a contribution is postmarked by the 31st of December, I assume we are required to include that figure in our 2010 tally? Is there anything else we should know about the reporting of contributions?

Answers:

Make sure to check collection boxes, if any, prior to the close of the year. Checks that are received by the church prior to January 1 are included as 2010 contributions as long as the funds are available to the charity. A post-dated check (after December 31) must be posted as 2011, even if a 2010 date is recorded on it, since it cannot yet be deposited. Checks received via US Mail postmarked by December 31 should be recorded for 2010.

Make sure to provide date and amount for any individual contributions greater than $250. A simple total for the year is appropriate unless additional notation is necessary to list these larger amounts. Many churches simply give a list of all contributions for the year no matter the amount. Then they provide a total as well.

Finally, provide a statement that no goods or services other than intangible religious benefits were provided in return for the contributions. IRS Publication 1771 is helpful in addressing many charitable giving questions. A link is provided below.

December 15, 2010

Deductible Travel Expenses for Volunteers

Question:
You have covered in several previous posts the question of whether contributions made in support of mission trips are deductible. Here's a question with a slightly different slant.

If a congregation member, who is a member of a mission team and travels with that team, purchases supplies, food, or other “goods” for the trip and those supplies are used directly and immediately for the purpose of the trip (in other words, they do not run those contributions through the church), will that person be able to deduct those as contributions, assuming they have supporting documentation? Will they have to get some kind of statement from the church in support of those contributions? Would they claim these on Schedule A, assuming they itemize?

Answer:

IRS Publication 526 offers some good help to answer this question.
"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."

The Publication has a good section on travel expenses, plus a table of Volunteer's Q&A. It includes a summary of deductible travel expenses. "These include 1) Air, rail, and bus transportation, 2) Out-of-pocket expenses for your car, 3) Taxi fares or other costs of transportation between the airport or station and your hotel, 4) Lodging costs, and 5) The cost of meals. Because these travel expenses are not business-related, they are not subject to the same limits as business related expenses."

So in answer to the questions above, "yes," with proper documentation the costs for volunteers' travel expenses can be deductible.

In the event of an audit, the taxpayer may need proof from the church that volunteers were involved in a charitable activity that involved paying their own costs in giving services (to use Publication 526 language). Absent an audit, such proof is not necessary.

Volunteers' costs are deducted along with other contributions on Form 1040, Schedule A.

December 08, 2010

Health Reimbursement Arrangements for Pastors With No Taxable Compensation

Question:

Three pastors of a congregation receive a housing allowance and no actual wage. Can a Health Reimbursement Arrangement be made available to a pastor who's only compensation is a housing allowance?

Answer:

A minister whose compensation is designated 100% as housing allowance is still considered an employee eligible for all statutory fringe benefits that other workers enjoy.

Question:

It is understood that HRAs cannot be taken through voluntary salary reductions. May a church have an agreement with a pastor that he receives a monthly HRA that, if unused, is designated as a housing allowance instead?

Answer:

Since an HRA must be 100% funded by employer contributions, it is not considered taxable compensation. The plan may be established to permit unused amounts to roll over into a subsequent year. However, to distribute amounts contrary to the design of HRAs places the whole arrangement in non-compliance. IRS Publication 969 makes this quite clear:

"If any distribution is, or can be, made for other than the reimbursement of qualified medical expenses, any distribution (including reimbursement of qualified medical expenses) made in the current tax year is included in gross income. For example, if an unused reimbursement is payable to you in cash at the end of the year, or upon termination of your employment, any distribution from the HRA is included in your income. This also applies if any unused amount upon your death is payable in cash to your beneficiary or estate, or if the HRA provides an option for you to transfer any unused reimbursement at the end of the year to a retirement plan."

December 06, 2010

When the Church Finances Get Too Much for Volunteers

Question:

A New York City church has been handling all its church finances through volunteers, but the work is getting overwhelming. It is considering hiring an outside firm/person to handle all church finances- reimbursements, writing checks, payroll, bookkeeping. Is this a good idea? What is a reasonable price?

Answer:

The bookkeeping function for volunteers has always been, in my opinion, the most time-demanding volunteer responsibility in most churches. When most churches reach a point of advanced time and expertise requirements they seek to hire help rather than to continue using volunteers.

Of course, some functions cannot nor should be "farmed out." The confidentiality and security required for offering counts and deposits typically means that volunteers will continue performing these duties. Maintenance of donor records often stays under the watchful eye of church members. Of course, processes to approve invoices for payment and to set compensation arrangements must be overseen by the church leadership, as does creation of the church budget. So church member expertise is still much needed.

It's good to ask potential part-time employees or bookkeeping service providers whether they have experience in accounting for churches, particularly payroll functions since there are significant differences between churches and business enterprises. Often, experienced people are not available so a new hire must be expected to do some research to learn about ministerial compensation. As many have discovered in this blog, there are some tips along the way here, but a good general resource may be helpful. Type "tax" in the search window of Christianbook.com and you will find helpful resources by B.J. Worth and Dan Busby. Check out Churchlawandtax.com as well.

Further, the new employee or self-employed bookkeeper may not be familiar with the church's method of financial reporting--typically, an "Other Comprehensive Basis of Accounting." The individual must have a solid understanding of accounting in order to avoid attempting to convert the ministry to his or her own limited sphere of experience in for-profit business accounting.

As to reasonable pricing, each geographic area has its standard of living that a church must consider. Volunteers who have performed financial services in the past may be able to suggest the amount of time it will take to fulfill the work. Then, local wages rates must be considered. Typically, independent firms must charge more but will have their own computer systems and will have access to greater expertise. These all are matters that must be considered.