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Showing posts from February, 2011

Taxable Support of Foreign Missionary or Benevolence?

Question:

A missionary is partially self-supporting and partially supported by donors. A church is considering giving him funds to help subsidize his daughter’s overseas schooling. Will this amount be reportable on Form 1099-MISC as taxable income or could it be considered a benevolence gift for which a Form 1099 would not be required? Would there be a difference if the church made checks out to him vs. making them out to his minor daughter who is receiving the schooling?

Answer:

The missionary is receiving the support targeted for his daughter's education due to his ministerial status. If the child been a needy individual within the church's congregation for which no services were rendered, then there would be no tax consequences. However, it appears that the support is in consideration of the missionary's overseas work. If the payments are directly to the missionary and not through his mission agency, then Form 1099-MISC should be issued. Making the payments directly to his…

100% Housing Allowance with Expenses

Question:

An ordained pastor receives part-time compensation from his church, designated 100% as housing. In order to pay SE tax on the housing allowance amount, where does he record this on his tax return?

He has a few expenses that he could deduct, but is hesitant to do so while showing no income. Should he deduct these expenses?

Answer:

Since 100% of his compensation was designated as housing, none of his expenses are deductible as business expenses on either Form 2106 or Schedule C. However, when calculating his SE tax, the deductions can be applied before entering his SE income on Form 1040, Schedule SE.

Continuing Payment of Wages to Surviving Spouse

Question:

A pastor recently died. His church desires to gift the amount of his salary to his spouse for a yet-to-be-determined amount of time. Is there any IRS limitations to the amount we can give? No services are provided by her.

Answer:

There are no limitations on the amounts, but they will be taxable as ordinary income. I tried to do some quick research to see if I could find an exception, but they only related to public safety officers and military personnel.

Form W-2 Example

Question:

The church pays me as a part-time pastor $1,000 a month. $500 of that was designated as "housing" in a business meeting. How should they report that?

Answer:

Assuming a full-year's compensation, $6,000 is reported in Box 1 of Form W-2 as taxable compensation. I recommend that the $6,000 paid as non-taxable housing allowance be reported in Box 14. This reports to you the amount that you must document for housing allowance purposes (see other blog entries for a review of these rules).

Housing Allowance Erroneously Reported on Form 1099-MISC

Question:

A minister received a Form 1099-MISC from a church. Most of the amount on the Form was designated as housing allowance (recorded in an official document by the church board when he began working for the church). He doesn't see a way to report this amount on his tax return, excluding it from federal income tax while paying the Social Security and Medicare (self-employment) taxes on it.

How should this be reported? Where does it go on the IRS tax forms?

Answer:

The church has filed an erroneous Form 1099-MISC. Housing allowance is not reportable as taxable income because it is exempt from income tax. The preparer should be apprised of this error and asked to file a corrected Form 1099-MISC. Near the end of the January 29, 2011, blog posting that I've linked below, I address the issue of housing allowance and Form 1099-MISC reporting-perhaps it will be helpful.

Definition of a Minister

Depreciation Entries for Churches

Question:

We have a church building valued at $351,000 which includes land of $120,000. How long should we depreciate the church, and will a parsonage be depreciated for the same period?

Answer:

This question brings up two important points.

1. Assuming that the church is best served by using an accrual basis of accounting in accordance with Generally Accepted Accounting Principles (GAAP), then the church property's value is not the basis for depreciation. Original cost is used. The estimated useful life that many organizations use for real property is 50 years. The same holds true for the parsonage.

2. In my opinion, many small churches are better served using the modified cash basis. Lay people and pastors alike have a better chance of understanding the reports. If external parties demand it, then GAAP may be necessary. Check out the New Downloads on my website, www.MinistryCPA.org. Select the presentation: Church and Christian Ministry Financial Management option. It's a MS--Powe…

Charity Refuses to Provide Year-End Giving Statement

Question:

A person contributes to a charitable organization including individual contributions greater than $250. In spite of repeated efforts, the taxpayer cannot gain the cooperation of the charity to provide the statement. What can the donor do?

Answer:

According to IRS Publication 1771, the answer may be "nothing." Of course, the donor can stop making contributions.

The IRS:

"There are recordkeeping and substantiation rules imposed on donors of charitable contributions: 1) a donor must have a bank record or written communication from a charity for any monetary contribution before the donor can claim a charitable contribution on his/her federal income tax return; 2) 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 (my emphases).

"An organization that does not acknowledge a contribution incurs no penalty; but…

Housing on Church Property for Custodian

Question:

A house sits on a church's property. The church custodian was asked to move into the house. The custodian is now receiving his regular part-time wages in addition to “free” housing in exchange for additional on-call hours worked for security and such.

Is this considered additional income for the custodian?

Answer:

IRS Publication 15-B addresses this question:

"Lodging on Your Business Premises. You can exclude the value of lodging you furnish to an employee from the employee's wages if it meets the following tests: 1) it is furnished on your business premises, 2) it is furnished for your convenience, and 3) the employee must accept it as a condition of employment.

"The exclusion does not apply if you allow your employee to choose to receive additional pay instead of lodging.

"On your business premises. For this exclusion, your business premises is generally your employee's place of work.

"For your convenience. Whether or not you furnish lodging for yo…

Bookkeeping for Expenses--Part Budget, Part Donation

Question:

A church bookkeeper uses Quickbooks. He asks: "How do I set up my Chart of Accounts in such a way that I can easily account for giving and spending?"

He offers the following example. The youth have a budget account for expenses of $500. The actual expenses for the youth was $1,500, but the youth raised $1,000 through donations. "So," he says, "in essence the youth ministry was on budget."

What do you recommend?

Answer:

I recommend that churches use Designated Fund accounts to record designated gifts and their matching disbursements. This provides good accounting for these gifts, plus it avoids posting income and expenses in the General Fund for which budget accounts have been established. Co-mingling these Funds can mess up budgeting and lose track of designated contributions. Here's the entries I'd recommend in the above example:

First --
$1,000 Debit to Cash/Checking to record the deposit of donations designated to the youth.
$1,000 Credit to…

Parachurch Ministries Under the Authority of a Church

Question:

A church has a member who, on his own, founded a ministry. The ministry has not pursued recognition by the Internal Revenue Service as a tax-exempt organization under section 501(c)(3) of the Internal Revenue Code. Also, it is not a formally sponsored outreach program of the church.

The member has asked whether the church would act as a clearing house for designated donations towards his ministry. Most of the donations would come from non-attendees of the church. Checks would be made out to the church designated for the ministry. The founder would then use the donations to pay for the expenses associated with it. The over arching goal of the ministry is in harmony with the church's mission. Can the church issue tax-deductible receipts for these designated donations?

Answer:

This is a good question that has been answered, in principle, in several other entries in this blog. Type "conduit" in the above search window for more.

My advice has always been to churches and …

Reconstructed Church Financial Statements for Bank Financing

Question:

A church owns real estate and has no mortgage. There are no records indicating the original cost of land or improvements (circa 1955). The church now plans to buy land and to build elsewhere. The bank wants financial statements as the church seeks a loan. How does the the treasurer value assets for which s/he has no costs? This includes not only the building and land, but most of the furnishings.

Answer:

The answer depends, in part, on the requirements placed on the church by the bank. If it insists on financial statements in accordance with Generally Accepted Accounting Principles (GAAP), then the treasurer has a lot of work ahead for him or her, and the bank is going to wait a while to receive its statements. Further, professional assistance may be required.

It might be that switching to GAAP reporting is long overdue for many large churches, but most small churches use non-GAAP cash or modified cash methods which work well for their congregations.

GAAP will require the church …

Contributions to Foreign Churches

Question:

Do designated gifts towards foreign churches qualify as tax-deductible? The foreign church itself does not issue tax-deductible receipts. Moreover, some but not all of these foreign churches already receive some financial support from our church's missions budget.

Answer:

IRS Publication 526 addresses this issue as it informs individuals who make contributions to what it calls "Nonqualified Organizations" --

"You cannot deduct contributions to organizations that are not qualified to receive tax-deductible contributions, including ...

"Foreign organizations other than 1) A U.S. organization that transfers funds to a charitable foreign organization if the U.S. organization controls the use of the funds or if the foreign organization is only an administrative arm of the U.S. organization, or 2) certain Canadian, Israeli, or Mexican charitable organizations."

The Publication addresses item two in greater detail, for readers so inclined to pursue it.

Regardi…

Single Member Limited Liability Company (SMLLC) Start-up Questions

Questions:

Can you tell me the pros and cons of a SMLCC choosing a taxation option as either a Sole Proprietorship or a Corporation? In a SMLCC, does the member receive a salary from the company? How should the bank accounts be set up?

Answers:

State law generally governs Limited Liability Companies (both single and multiple member). Generally, a SMLLC is taxed as a sole proprietorship. In my opinion, if a start-up business owner understands and desire the arrangements a corporation offers, then s/he should incorporate rather than attempting to operate an LLC as a corporation. One's attorney should be consulted relative to a particular State's rules.

A SMLLC sole proprietor does not receive a salary with tax withholdings, etc. S/he is taxed as a sole proprietor who takes owner draws during the year, but reports the full net business income on Schedule C of Form 1040 on his or her annual tax return.

The SMLLC must apply for a federal Employer Identification Number (link below) which…