January 30, 2011

Ministers Employed in Parachurch Organizations Who Do Not Perform Sacerdotal Duties

Question:
Does a member of a mission organization, who has been commissioned, qualify for the ministerial housing allowance even though not performing sacerdotal duties?

Answer:
It depends, but here's the general guideline from Treas. Reg. § 1.107-1(a): "examples of specific services considered duties of a minister."

-- 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.

Publication 517 further helps to define ministers in parachurch organizations. I'll provide the entire section to give readers some context.
"Most services you perform as a minister, priest, rabbi, etc., are qualified services. These services include:

-- Performing sacerdotal functions,
-- Conducting religious worship, and
-- Controlling, conducting, and maintaining religious organizations (including the religious boards, societies, and other integral agencies of such organizations) that are under the authority of a religious body that is a church or denomination.

"You are considered to control, conduct, and maintain a religious organization if you direct, manage, or promote the organization's activities.

"A religious organization is under the authority of a religious body that is a church or denomination if it is organized for and dedicated to carrying out the principles of a faith according to the requirements governing the creation of institutions of the faith.

"Services for nonreligious organizations. Your services for a nonreligious organization are qualified services if the services are assigned or designated by your church. Assigned or designated services qualify even if they do not involve performing sacerdotal functions or conducting religious worship.

"If your services are not assigned or designated by your church, they are qualified services only if they involve performing sacerdotal functions or conducting religious worship."

January 29, 2011

Payments to Widow of Former Pastor

Question 1:

A church's pastor passed away in 2010. In recognition of his years of past service, the church continued his salary payable to his wife for a short time. Does a Form 1099-MISC need to be issued for that amount?

Answer 1:

The compensation is reportable in the same manner as was the former pastor's -- typically on Form W-2. However, the widow is not eligible for a non-taxable housing allowance designation (Revenue Ruling 72-249).

Question 2:

The church also had agreed to pay health care expenses for the former pastor's wife for an indefinite period. Does that amount need to be reported as well?

Answer 2:

"Contributions by an employer to a health and accident plan, which was adopted during the employee’s employment and continues to provide benefits to the spouse and dependents after the employee’s death, are excludable from gross income under section 106 of the Code" (Revenue Ruling 82-196).

Year-End Charitable Giving Statements

Question 1:

Is there a required date by which contribution statements should to sent to church constituents?

Answer 1:

There is no mandatory date for distribution of contributions statements. However, IRS Publication 1771 states, "a donor is responsible for obtaining a written acknowledgment from a charity for any single contribution of $250 or more before the donor can claim a charitable contribution on his/her federal income tax return." If the church fails to provide this statement within a reasonable time, then donors should request it.

Question 2:

Is it inappropriate to list only a total amount given for the calendar year or must there will a statement with a record of each offering given?

Answer 2:

Please see my December 29, 2010, posting linked below:

Review of Year-End Charitable Giving Reports by Churches

Definition of a Minister

Question:

A man serving in the capacity as pastor is not yet ordained, but serving "on trial" and will come up for ordination in 2011. He received a small amount of compensation in 2010 (but greater than $600), all of which the church designated by formal action as housing allowance. Though he is not yet ordained can he have a housing allowance or will everything he received in 2010 be reported on a Form 1099-MISC?

Answer:

A minister is not required to be ordained to qualify as a minister. As long as he fits the definition of a minister he is eligible for a housing allowance and other ministerial tax provisions. This includes the potential that 100% of his compensation may be designated as a housing allowance. When the pastor files his tax return, he must then apply the three-part test for a housing allowance to determine his exclusion. This test is discussed in other postings to this blog.

The Internal Revenue Service's "Minister Audit Technique Guide" states the following.
"Treas. Reg. § 1.1402(c)-5(b)(2) provides that service performed by a minister in the exercise of the ministry includes:
  • Ministration of sacerdotal functions;
  • Conduct of religious worship;
  • Control, conduct, and maintenance of religious organizations (including the religious boards, societies, and other integral agencies of such organizations), under the authority of a religious body constituting a church or denomination.
"Treas. Reg. § 1.1402(c)-5(b)(2) also provides that whether service performed by a minister constitutes conduct of religious worship or ministration of sacerdotal functions depends on the tenets and practices of the particular religious body constituting the church or denomination."

I generally recommend that churches consider licensing their pastors recognizing their call to the gospel minister in situations where they are preparing for lifelong ministry but are not yet ordained.

In the case when 100% of the compensation was properly designated by the church as non-taxable housing, no Form W-2 or Form 1099-MISC is required. However, I recommend that the church provide the pastor a letter communicating the amount to him so that he can properly fulfill his responsibility to apply the three-part test. Further, the housing allowance is only exempt from income taxes. He will need to consider his self-employment tax obligation for these earnings.

January 23, 2011

Debits and Credits for Designated Gifts

Question:

A church is setting up Quickbooks for its accounting, but its personnel have little experience with fund accounting. What are the entries for the receipt and disbursement of designated gifts and the opening balances?

Answer:

I recommend that most churches that do not need to present financial statements in accordance with Generally Accepted Accounting Principles observe the following steps. Even those churches that do report using GAAP can employ these methods, but must make some adjustments when preparing their financial statements.

What I will demonstrate relates to what most churches call "designated gifts" (CPAs call these Temporarily Restricted gifts). These are gifts that donors contribute with the intention that the church will spend the funds as they direct. Most churches do not receive "endowment gifts" in which donors prohibit the expenditure of the core gift (CPAs call these Permanently Restricted gifts). Only earnings on the subsequent investments made with the gift money may be spent and then only for the purpose stipulated by the donor.

I will illustrate assuming a church is using QuickBooks to record transactions in a designated fund called Missions.

Opening Balances entered into QuickBooks:

1. In the Chart of Accounts, establish a new account entitled Designated Funds. Categorize it as an Equity Account. This account will be a title account to which no transactions are ever recorded. Enter no opening balance.
2. In the Chart of Accounts, establish a new account entitled Missions. Categorize it as an Equity Account. In the Sub-Account window select Designated Funds. Enter the missions fund opening balance. As a new QuickBooks "Company" is established with opening balances carried over from the church's existing accounting system, QuickBooks posts a balancing entry to an account called Opening Balance Equity. In most cases, once all opening balances are entered, a General Journal entry should be made to zero out this balance and reclassify it to a new equity account called General Fund Balance.

Now, the Designated Funds: Mission account should be reflected on the church's Balance Sheet which may be printed from the Reports Menu.

Next, two sample entries.

Receipt of funds designated by a donor to missions:

$x,xxx Debit Cash account (typically, a deposit to the checking account)
$x,xxx Credit Designated Funds: Missions account

Expenditure of funds from gifts previously designated by donors to missions:

$x,xxx Debit Designated Funds: Missions account
$x,xxx Credit Cash account (typically, a check written against the checking account)

Form 1099-MISC for Missions Trips

Questions:

Should a church issue a Form 1099-MISC in the following situations?

1. Church member takes a short term mission trip. Money is raised by asking for donations to the church. The church writes checks to the person for more than $600. No accounting of expenses is required of the member.
2. Same as above, but church reimburses expenses for the trip based on an accounting provided to the church (essentially an expense report).
3. Are the answers different if the trip is not actually sponsored by the church but done by a church member through another organization?

Answers:

Assumptions:
  • The church member is serving as a volunteer and not an employee of the church.
  • The trip is for ministry purposes, not a disguised personal vacation.
If the church member had paid his or her own travel expenses, they would have been deductible as an out-of-pocket charitable contribution. Any reimbursements received simply reduce the amount of charitable deduction.

Form 1099-MISC is issued for amounts that payees receive as Miscellaneous Income. Since the disbursements were not in exchange for services rendered, they are not reportable on Form 1099-MISC.

Ministries expect volunteers to return any excess funds provided to them that are not needed to provide religious services. When an employee (not a volunteer) represents a ministry on a ministry trip, any excess disbursement to him or her will be considered taxable income. If no documentation is received from the employee, the entire amount should be treated as a non-accountable plan fully reportable on his or her annual Form W-2. The employee can then deduct the allowable expenses on Form 2106 as employee business expenses.

The sponsor (church or otherwise) should not effect the above answers.

January 22, 2011

Reimbursement of Minister's Expenses While on Sabbatical

Question:

A church's minister is taking a trip while on sabbatical. The trip is a combination of sabbatical activities and vacation. The church has funds to pay for these expenses.

When the church reimburses the minister for sabbatical expenses, what are the tax implications? Are reimbursements reported to the IRS as ministerial income? Are taxes required to be withheld? Does the church have to decide the taxable status for each individual expense? What liability exposure might the treasurer of the church incur for errors?

Answer:

Employee business expenses reimbursed through an accountable plan are not taxable to the employee. They are not reportable on Form W-2, nor subject to withholding. Accountable plan rules do require the employer to receive and maintain documentation as to the business purpose, date and amount of reimbursements. Failure to comply with these rules may result in the filing of an erroneous Form W-2 – something that the preparer (the church treasurer) can be held responsible for by the IRS. IRS Publications 463 and 15 provide additional information.

Housing Allowance for U.S. Resident Supported for Itinerant Foreign Ministry

Question:

A non-profit Christian organization supported a missionary who is not an ordained minister. He frequently traveled to a foreign country to serve the organization's charitable purposes. While there, the organization provided his temporary living expenses. He maintained a personal residence in the U.S. At the end of the year, he declared to the organization his housing expenses and requested that a portion of his support be, thus, treated as non-taxable.

On this basis, can the ministry exclude a portion of his support as a ministerial housing allowance?

Answer:

First, if the employee meets the definition of a minister, it is not necessary that he be ordained. Click on the following link for more information.

IRS Definition of "Minister"

Second, a minister's primary residence qualifies for the housing allowance designation. Based on the information provided in the Question, the minister appears to meet this requirement.

Finally, the housing designation may not be made retroactively. This requirement appears to prohibit the income exclusion for compensation of past services. However, the minister and organization should establish a housing designation for future compensation.

Church Intern and Residency Programs

Question 1:

A church is considering setting up an internship or residency program that would focus on young people in its community who are pursuing ministry as a vocation. The church general budget or missions fund may pay the individual a few hundred dollars per month, but the remainder of his full-time support would have to be raised from people both inside and outside the church.

How can the church appropriately accept funds from donors to support the individuals in this program while ensuring it avoids donor control issues?

Answer 1:

The church leaders demonstrate understanding of important tax rules when they address the donor control issue. Donors should not be permitted to use (control) the church as a conduit to satisfy non-charitable purposes. A common example of this type of control might be a parent or grandparent who wishes to pay a child's Christian camp fees or school tuition while gaining a tax deduction.

The situation described above is a common charitable activity of many churches. To receive tax-deductible gifts, the church must establish a fund to account for the gifts, thus avoiding co-mingling the funds with unrestricted gifts used for the church's general operations.

Just as important, via direct communication with donors or clearly communicated policy the church must maintain control over the funds. If a donor contributes to the fund knowing that a particular individual has been identified by the church as worthy of such a ministry, he or she should receive a receipt from the church establishing the deductibility of the gift. However, the donor must also understand that should the named individual withdraw participation, the church may identify other recipients who will fulfill the purpose of the charitable gifts.

Question 2:

Furthermore, what are the implications of having the church provide some support directly through payroll and the remainder coming from outside contributions?

Answer 2:

It is my experience that most churches in these situations exercise significant oversight and accountability in the ministries of interns. The intern should be classified as an employee of the church, not as independent contractor. Thus, the full amount of compensation (both church general funds and funds received from donors) is reportable on Form W-2. Independent contractor payments are reported, in full, on Form 1099-MISC.

For more information, type "control" or other appropriate search terms in the Search Window of this blog.

January 03, 2011

Form 1099 for Payments to Other Ministries

Question:

A church supports various ministries. If a check is written to a ministry (a tax-exempt organization), does a church issue a Form 1099-MISC to that ministry. The church leaders understand that it is to issue Form 1099’s when it compensates individuals in a ministry.

The posted question concludes: "The only thing we can find is that in general we do not have to issue a Form 1099 to a corporation."

Answer:

One of the exceptions to required reporting of payments listed in the 2010 instructions for Form 1099-MISC is "payments to tax-exempt organizations." Therefore, payments to a ministry are not reportable.

Churches that pay rent, services, etc. to individuals who are not employees (they receive Form W-2) must file Form 1099-MISC.

Thanks to the Patient Protection and Affordable Care Act of 2010...
Regarding the last sentence in the above Question, beginning with payments in 2012, for-profit corporations that are paid by the church for rent, services, etc. must also receive Form 1099-MISC from it.

The penalties for non-filing and for failure to withhold Backup Withholding, when required, are steep and will increase in 2012.

IRS Filing by Church if No Taxable Compensation is Paid

Question:

Does a church need to file an IRS form of any type if the church only pays professional reimbursement and housing allowance and not salary?

Answer:

Reporting of housing allowance to the IRS is not required. I recommend to churches that do pay taxable compensation to report the housing amount as a memo item in Box 14. This enables the minister to test whether any portion of the housing allowance is taxable. When no taxable compensation is provided I recommend that a church provide a report to its minister of the total housing allowance paid so that he may perform a similar test. However, that report is not submitted to the IRS. I have reproduced the three-part test below.

Professional reimbursements paid in an accountable plan are not reportable to the IRS. To review the requirements for an accountable plan, I suggest that viewers of this blog type "accountable plan" in the Search window.

Three-part housing allowance test:
The amount excluded from the minister’s gross income as a housing allowance is limited to the least of the following:

(a) the amount actually used to provide a home,
(b) the amount officially designated as a housing allowance, or
(c) the fair rental value of the home.
(Sources: IRS Publication 1828; Clergy Housing Allowance Clarification Act of 2002; IRS Regulation Section 1.107-1).