MinistryCPA - Corey A. Pfaffe, CPA, LLC

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 relig...

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).

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

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" ...

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: We recommend that most churches that do not need to present financial statements in accordance with Generally Accepted Accounting Principles (GAAP) 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 we 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 subsequ...

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 i...

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) c...

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 design...

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 charitabl...

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, s...

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 min...