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Showing posts from 2012

"Gift Tax" Exclusion for Church Employee Gifts?

Question:

A church or Christian ministry can give up to $13,000 to each employee as a non-taxable gift each year. Right?

Answer:

The $13,000 exclusion relates to inheritance gifts to beneficiaries prior to an individual's death, not to employer gifts to employees prior to the year end. The gift tax exclusion is $13,000 per year. Gifts above this amount will be viewed as potentially reducing a decedent’s taxable estate and denying estate tax receipts to the government.

Most gifts to employees by their employers are taxable to the employee and deductible by the employer. IRS Publication 535 communicates that food or merchandise gifts of “nominal value” are not taxable to the employee. The link provided below especially highlights this context. 

Publication 535 Business Expenses

Publication 15 is also helpful as it deals entirely with Fringe Benefits. Especially view, De Minimis (Minimal) Benefits.

Publication 15-B Employer's Tax Guide to Fringe Benefits

Church Official Statements of Annual Giving

Question:

What is the proper and legal wording for ministries to put on their statements to donors to indicate that no good or service was rendered for the stated giving?

Answer:

The IRS Publication 1828 publishes the rules regarding this, and other, legal documents which a church must prepare. 

"A donor cannot claim a tax deduction for any single contribution of $250 or more unless the donor obtains a contemporaneous, written acknowledgment of thecontribution from the recipient church or religious organization. A church or religious organization that does not acknowledge a contribution incurs no penalty; but without a written acknowledgment, the donor cannot claim a tax deduction. Although it is a donor’s responsibility to obtain a written acknowledgment, a church or religious organization can assist the donor by providing a timely, written statement containing the following information:
■ name of the church or religious organization, ■ date of the contribution, ■ amount of any cash co…

Establishing Retirement Housing Plan for Pastor

Question:

A church would like to provide housing for its minister after he retires. His retirement is still a few years off. What can the church do now to provide for its pastor after his retirement? The church would rather not use the parsonage to provide for this retirement housing.

Answer:

Churches have a few options worth considering when discussing how best to provide for a retired minister:
(1) The church can establish a 403(b) plan for a minister before he retires and make contributions to it. Uponretirement (retired and no longer providing services to the church), the pastor can use this to provide for his own housing, if so designated by the church. Following advice provided in other blog postings on MinistryCPA, distributions from the 403(b) account to the pastor may enjoy tax-free status as a housing allowance.
403(b) Retirement Distribution as Housing Allowance

As seen in the above link, the church can designate all or a part of the distributions as housing allowance. The part …

Church as a Conduit for Non-Deductible Gifts

Question:
A church has been asked to act as a conduit for a wealthy individual to give a considerable gift to a needy family in its community. The church has not yet identified this family as a target of its own benevolent fund nor does it intent to do so. Can the church accept the donation from the wealthy individual, granting a charitable contribution, and serve as a conduit to pass along nontaxable income to the needy family?
Answer:
We advise against participating in this situation. A September 9, 2009, blog post gives some helpful insight into this kind of situation.
Benevolent Fund Review
If the church decides to take on the family and support it through its benevolence fund, then that is different. This should still pass a reasonableness test in which the amount from the church is not a "token" gift to establish some legitimacy to the wealthy individual's tax-deductible gift. Rather, the church must demonstrate that it has truly seen and responded to the need. A church…

Church Renting Parsonage

Question:

A church would like to rent out its parsonage in order to raise money to repair its church building. What will be the consequences of doing this?

Answer:

A November 14, 2012 blog post applies directly to this situation.

Church Renting Building: Unrelated Business Income Tax

As in the November post, the church will have income or local property tax consequences to consider.

Congregational Gifts to Missionaries

Question 1:

A church asks it members to consider making a contribution to its missionaries for a Christmas Gift. Contributions are designated to the church in general, i.e. "The Missionary Christmas Fund" (not to any individual missionary); the church leadership has full control over what amount it gives to each missionary. After all contributions are received, the church usually gives about $200 to each missionary, with checks issued to them personally. The individual contributors receive a tax deductible receipt. Is this correct? Does the church need to issue a Form 1099-MISC to each missionary, since the amounts are not over $600?

Answer 1:

Since the congregants donated directly to the church and not the individual missionary, their donated amounts are tax deductible. The amounts they donate should be reported to them at the end of the year in a statement listing their donations.

The $600 referred to in the question is an annual amount. If the church disburses more than $600t…

Review of Congregation Donations to Staff Members

Question:
A church recently made its congregation aware that they can give personal Christmas gifts to pastoral staff (if they choose), but that members would receive no charitable contribution credit for tax purposes. Is it correct that those personal gifts are not taxable income to the staff members since they don't run through the church records at all, but are simply personal gifts?
Answer: This assumption is correct.
There are two ways members of a congregation can give gifts to staff members. One involves corporate action and the other involves personal and individual action.
1) The church can take up a collection for staff members. In this case, the contributions are deductible to the donors, but must be reported as income to the staff members since they are deemed payments received from an employer.
2) Church members can give directly to staff members. In these cases, the donations are not deductible to the donors, but the staff members do not have to report the gifts as income…

Church Members Carrying Money to Foreign Mission Agency

Question:

Members of a local church recently went on a mission trip. Part of the purpose of their trip was to carry a sum of cash to a foreign mission agency for use in its mission. This amount was donated by the home church of the members. The individuals paid for their own expenses so that the entire donated amount was given to the mission agency for use in the field. Does the church need to issue Form 1099’s to the individuals?
Answer:
No, the church does not need to issue Form 1099-MISC’s to the individuals since the church, in effect, donated the money to another tax exempt organization. However, the church should receive documentation from the mission acknowledging receipt of the money. This ensures that all of the money was used by the foreign mission agency, and not by the individuals to cover travel expenses.
Some ministries provide cash to volunteers for foreign travel. Careful documentation of personal travel, local transportation, meals and lodging expenses must be required o…

Churches Filing Annual/Quarterly Federal Tax Return

Question:

A church recently received notification of its new federal Employer's Identification Number (EIN) which stated that it must file Form 940, Form 941, and Form 1120. Why does the church have to file these and can it avoid doing so?

Answer:

Churches as tax exempt organizations are not subject to filing corporate income tax returns (Form 1120). Further, as tax exempt organizations, churches are not subject to federal unemployment tax (Form 940). 

Most churches are however responsible to file Form 941 on a quarterly basis. On this form, churches report employee earnings and withholdings, and employer taxes due.

Form 944 may be requested instead of Form 941. But a new employer must request the opt out by calling or writing the IRS. For the opt-out deadline, see Rev. Proc. 2009-51: Rev. Proc. 2009-51. Smaller churches will find it advantageous to file the Form 944 as it is filed only once a year. 

However, some small churches with only a solo-pastor who has no federal withholding sub…

Roth IRA Contributions Paid by Church to Pastor's Account

Question:

I realize that an employer cannot make contributions to a Roth IRA; only the owner (pastor) can. However, can the church deduct an amount from the pastor's pay and make the IRA payment directly to the bank or company that administers the pastor's Roth IRA account? (Realizing that the contribution has to be added to the Pastor's gross income reportable on Form W-2.)

Answer:

Yes. This facilitation is permissible; essentially, it's no different than withholding from the pastor for any other "convenience" payment that is not a statutory / tax-free benefit. The same conditions apply relative to contributions to a Traditional IRA account on behalf of the pastor.

Church Renting Building: Unrelated Business Income Tax

Question:

A church is considering renting its building to another church in the evenings and its second parsonage house to a family. What are the tax ramifications of doing this, since this is not normal income for a church?
Answer:
There are both potential Unrelated Business Income Tax (UBIT) and local property tax concerns. First, tax exempt organizations generally do not need to report rental income as unrelated business income (UBI) unless it is financed with tax exempt debt instruments. "Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. Rents from personal property are not excluded" (IRS Publication 598).
However, depending on your local municipality assessor’s office, the conversion of church use of a parsonage to rental property to a non-church staff member may cause the property to be placed back on the local real estate tax roll. We recommend the church contact the local assessor’s of…

Church Gifts to "Volunteers"

Question:

A minister is in charge of a restricted benevolence type of fund/ministry. He is not an employee of the church but is a member and does volunteer in various church related activities. The church receives gifts, some of which are directed to his ministry and some that are  specifically directed to him, all of which are deposited into the church's restricted fund. The church also gives him $200 per month from the restricted fund. The church has been giving him a Form 1099 for the $200 per month at the end of each year.  Is this correct, or are the monthly gifts the church gives non-taxable to the minister/volunteer.  Is there any potential that the $200 per month could be classified as a benevolent gift?

Finally, are the gifts to him and/or his ministry tax deductible by the donors?

Answer:


It is apparent that the church is providing general and donor-designated financial support for a minister who is providing services endorsed by the church. If the church supports an individ…

Contacting the IRS Regarding Altered Form 4361

Question:

A church treasurer recently was handed a Form 4361 by his church's youth minister. It appeared to have been altered. Can the treasurer contact the IRS to get verification of the approval?

Answer:
Regardless of the youth pastor’s success or failure to gain an exemption from self-employment (SE) tax on ministerial earnings (by virtue of his successful Form 4361 application), the church’s treatment of his wages is unaffected. By definition, a minister is a dual status employee. This means that he is considered self-employed for purposes of SE tax. He is not subject to nor eligible for FICA tax withholding and matching by the church. If he fails to pay his own SE tax on his personal return and it is determined by the IRS that he has no Form 4361 approval, he will be facing a very large tax penalty and interest assessment.
Our website provides an aid to preparing a church's Forms W-2. They are prepared in exactly the same way whether or not the pastor has opted out of SE tax…

Loss of PropertyTax-Exempt Status for Parsonage

Question:

A youth minister and his wife live in the church parsonage where the wife runs a home photography business. Does this business put the church at riskof losing its exempt status?  How can we limit that risk?

Answer:

Perhaps a good place to start is to quickly review the aspects of tax-exempt status. Exempt organizations typically enjoy the following benefits:
No federal or state income tax on the excess of receipts over disbursementsDonors to these organizations receive tax benefits for their contributionsReal property owned by the entities are not subject to real estate taxesPurchases of personal property are exempt from sales taxEmployee compensation is not subject to federal or state unemployment taxesIn this case, the minister should not be worried about losingincome tax exempt status, but rather property tax exemption. In virtually all states, church facilities, including parsonages, are exempt from local property taxes. Whether the operation of a photography studio within t…

Missionary Support from Church Acting as a Mission Agency

Question:

A missionary is receiving partial support from donors who contribute to her home church on her behalf. How should this income be reported by the church and by the missionary?
Answer:

Because the church is not using a mission agency, rather, amounts are sent directly to the missionary, the church is considered the payer of the compensation.
A November 14, 2010, blog post explains the requirements for a church that chooses to act as a mission agency:
Church as Mission Agency
While a church can act as the mission agency, mission agencies can often provide for missionaries better than a church could. Since most mission agencies treat missionariesas their employees, they can establish retirement plans, health plans, and provide many other benefits for the missionaries that a church is unable to provide. In the absence of a mission agency, the church is responsible to file an information return (either a Form 1099-MISC or Form W-2). The missionary is subject to income and self-employmen…

Compensation to Volunteers

Question:

A church has used the voluntary services of a bookkeeper and would like to gift to her a $500 gift card. Since she is not an employee of the church, is this gift taxable?

Answer:

The gift card will be treated as taxable compensation for services rendered. If she is an employee, this income will be reported on a Form W-2. If she is not an employee her income will be reported on a Form 1099-MISC (unless her annual earnings fall below $600) and will be reportable by her on Schedule C and also subject to Self-Employment tax on Schedule SE.

Volunteers who incur documented out-of-pocket expenses on behalf of a church may be reimbursed on a tax-free basis. This includes use of an automobile to travel to the church site and on other errands. The mileage reimbursement rate for such volunteers in 2012 is $.14 per mile. In December 2012, the IRS will likely announce its 2013 standard mileage rates.

Classifying Church Leaders as Non-Employees

Question:

A church wishes to pay several of its key leaders a monthly amount of about $250 per individual. Is it possible to do this without them becoming employees? If so, what are the limitations to the church compensating to them?

Answer:

It must be determined whether these individuals are employees or non-employees. Details within the answer provided in an April 21, 2009, blog post will help in determining this.

Church Worker: Employee or Independent Contractor

Since the church, it is assumed, controls what the key leaders do, they will most likely be considered employees. In the rare situation that key leaders could be classified as non-employees, the church must issue Form 1099-MISC to individuals whose compensation is $600 or more. But we can only think of one example of non-employee status in the situation of compensating "key leaders" -- circuit-riding preachers of a day gone by. For the sake of information, a second issue to consider here is whether their jobs are minist…

Employee or Independent Contractor

Question:

A 501(c)(3) organization recently accepted the services of a married couple. This married couple does not receive compensation from the organization, but does receive donations from individuals who designate their donations to the organization on behalf of the couple. The organization controls the hours and projects of the couple. Should this couple be considered as employees or as independent contractors?

Answer:

There is strong motivation for nonprofit and for-profit organizations to treat their employees as non-employees. Typically non-employees are excluded from benefits available to employees (therefore, reducing organizations' costs). An April 21, 2009, blog post explained the IRS position on the classification of church workers. These same principles apply to all 501(c)(3) organizations:

"In most cases, non-ministerial church workers (individuals who are not performing the functions of a minister) should be classified as employees and subject to FICA withholding …

403(b) Retirement Distributed as Housing Allowance

Question:

A pastor recently left his ministry to start a business. While in the ministry, he had a 403(b)* plan which he contributed to for over 12 years. When he retires, are the distributions from this 403(b) eligible for housing allowance, or will the IRS see this as not housing allowance eligible since he is no longer a minister?
Answer:
The 403(b) plan will be eligible for housing allowance, as long as the church designates it as such. A previous blog post provided some additional information on this issue. Excerpts and a link to the post merit revisiting:

"A retired minister may receive part of his or her pension benefits as a designated parsonage allowance based on past services. Trustees of a minister’s retirement plan may designate a portion of each pension distribution as a parsonage allowance excludible under IRC § 107 (Rev. Rul. 63-156, 1963-2 C.B. 79, and Rev. Rul. 75-22, 1975-1, C.B. 49)" (IRS Minister Audit Technique Guide published in April 2009).

Housing Designat…

Christmas and Birthday Gifts to Missionaries

Question:

A church's missions committee wishes to give Christmas and birthday gifts to its missionaries. Are these gifts taxable to the missionaries? Will the church be required to file Form 1099-MISC? Is there a way to give a missionary a non-taxable gift?
Answer:
Generally, all gifts to missionaries are consider taxable as compensation. However, the church will not have to issue a Form 1099-MISC to individual missionaries for gifts sent to and managed by the missionaries' mission agencies. These agencies are responsible to issue an appropriate report of income (either Form 1099-MISC or Form W-2). Further, mission support sent directly to missionaries (not through an agency) are subject to government reporting unless they total less than $600 per year. There is one way that gifts can be given to a missionary without being taxable to the missionary. Gifts given by an individual to an individual are neither deductible by the donor, nor taxable to the donee. If a member on his or he…

Re-classifying Designating Church Gifts

Question:

Can a church that received funds designated for one ministry/purpose use those funds for another ministry/purpose, or must it use all designated funds for their designated purpose even if the funds would be useful elsewhere?

Answer:

It is our belief that this is not a matter of IRS regulatory concern. It is more a matter of legal and ethical concern. Obviously, donors who give, for example, to a fund to acquire musical instruments will be greatly discouraged to see those funds spent for something other than their intentions.
When a church receives funds from its congregation, those funds are no longer under the individual's control, but under the church's control, meaning that the church has the authority to use these funds as it sees fit.
It is our understanding and experience that it is the Secretary of State’s offices in most states that address donor complaints. Donors have sought resolution of their complaints by going to outside agencies such as this when they beli…

Receiving Social Security Benefits on Earnings Received Prior to Opting Out of Social Security

Question:
A minister is deciding whether to opt out of social security for purposes of his ministerial income. He previously paid into social security through another non-ministry job, and is wondering if he would still get social security benefits if he decided to opt out of social security now that he is a minister?
Answer:
A minister who has contributed to social security and met the eligibility requirements will not be denied the benefit of his contributions if he decides to opt out of paying social security for his ministerial earnings. The minister should consult either the annual statement of projected benefits (called "Your Social Security Statement") he receives from the Social Security Administration or www.SSA.gov.

Opting out of social security only affects income received for ministerial services, not income previously receivedas non-ministerial compensation. Further, any non-ministerial employment or self-employment continues to be subject to social security and Me…

Church Rental of House--Tax Consequences

Question:

Can a church rent a property to use for its church parsonage? If so, can anyone live in the property as long as they're not paying rent to the church for living in the parsonage?

Answer:

According to the IRS’s Minister Audit Technique Guide:
“IRC § 107 provides an exclusion from gross income for a “parsonage allowance,” housing specifically provided as part of the compensation for the services performed as a minister of the gospel. The term “parsonage allowance” includes church provided parsonages, rental allowances with which the minister may rent a home and housing allowances with which the minister may purchase a home.”
The church provides either the parsonage or the rental allowances to cover the cost of housing for the minister. If an individual other than the minister had his rent paid for by the church, it may be considered compensation for that individual and, if so, would need to be reported as such. Possible scenarios:      Church rents house for destitute family as a…

Recording Church's New Building (and Depreciating it)

Question:

A church recently built a new church building. How should a church account for its fixed assets?  How should it account for the church building on its balance sheet?  How does it recognize depreciation?

Answer:

If a church uses full Generally Accepted Accounting Principles (GAAP) for its books, then fixed assets must be capitalized and depreciated. However, in many situations, it is our belief that many churches should use the modified cash basis. This means that capital asset purchases are recorded as expenses, and not as depreciable assets. Expensing asset purchases allows the church’s congregation to more easily understand the financial situation of the church. This concept of expensing assets is discussed at greater length in the following blog posts:

Church Accounting for Fixed Assets
Churches Recording Depreciation
For a MS-PowerPoint presentation on financial management for a church, follow the link provided below to MinistryCPA.org and click on the Presentation: Church an…

Review of Form W-2 Reporting for Ministers

Question:

Is it necessary for a church to withhold Social Security and Medicare (FICA tax) from its pastor’s compensation? How does the church report housing allowance paid to its pastor?
Answer:
Ministers are exempt from all withholding, including FICA tax. By Internal Revenue Code statute, ministers are dual status employees--employees in every respect except for purposes of withholding. For purposes of Social Security and Medicare they are treated as self-employed (SE) individuals. Therefore, boxes 3, 4, 5, and 6 on a Form W-2, for reporting Social Security and Medicare wages and withholding, are left blank. Whether the minister has personally chosen to opt-out of SE tax is irrelevant to the church. It cannot withhold and match FICA tax for a minister. 

We recommend that the housing allowance be reported in box 14 of Form W-2 as a memorandum item. Illustrations of these concepts are in the accompanying link to our website. Click on the Presentation: Church and Christian Ministry Compe…

Retirement Housing Allowance to Minister

Question:

A church wishes to help out its retired pastor by providing him funds, not from a qualified retirement plan, but from church donations. Should the church file Form 1099-R which is designed for pension distributions? Further, how can these funds be distributed to him without being taxable as self-employment (SE) income (perhaps as a cash housing allowance)? Answer: First, the retirement arrangement does not appear to be of the type reportable on Form 1099-R. However, the situation described above seems to closely relate to a detailed blog entry on September 9th2011:
 Retired Minister Housing Allowance SE Tax Free?
This appears, perhaps, to be one of the rare situations when a church is willing to fund a retired minister’s cash housing allowance when he is no longer providing services to the church ("retired", as discussed in the 9-9-11 blog post). Some nice tax benefits accrue to this pastor. If the provisions communicated in the above referenced blog posting are follow…

FICA Tax Withholding for Minister Teaching at Church School

Question:
A licensed or ordained minister at a church has opted out of social security and Medicare. He is now employed at a Christian school teaching music. Is this considered ministerial income subject to self-employment (SE) tax or non-ministerial income subject to FICA withholding tax?
Answer:
Non-ministers are subject to mandatory FICA tax withholding. Ministers are subject to self-employment tax. Some ministers have qualified to opt-out of paying this tax.

IRS Pub 517 partially addresses the question posted here:
"Teachers or administrators.   If you are a minister employed as a teacher or administrator by a church school, college, or university, you are performing ministerial services for purposes of the housing exclusion. However, if you perform services as a teacher or administrator on the faculty of a non-church college [including non-church schools and universities], you cannot exclude from your income a housing allowance or the value of a home that is provided to you.…

Missions Trip: Funds in Excess of Actual Expenses

Question:
A church wishes to help a college student with a foreign mission trip. Donations were gathered by the church and travel expenses were reimbursed as incurred. At the end of the summer the church wrote a check to the student for the excess funds above expenses. Should this church give the college student either a Form W-2 or a 1099-MISC?
Answer:
Yes, the church will be required to file Form 1099-MISC for the compensation component of the funds disbursed to the college student (the amount in excess of the reimbursements).
IRS Publication 1828 says “A church or religious organization must use Form 1099-MISC in any calendar year for… compensation paid to non-employees.” The payments in excess of actual expenses are considered compensation for services performed. 
This situation is unusual. Typically, when a church receives funds from its congregation, those funds are no longer under the individual's control, but under the church's control. This means that the church has the …

Church Reimburses Expenses Only (No compensation)

Question: Do churches and Christian organizations that provide only reimbursement for expenses incurred (and no salary) need to report these expenses on either Form W-2 or 1099-MISC?
Answer: Expenditures reimbursed to an employee under an accountable plan are not reported on Form W-2 or 1099-MISC. However, the organization must be sure that the reimbursements are of the non-taxable type. According to IRS Publication 463, “To be an accountable plan, your employer's reimbursement … arrangement must include all of the following rules. 1.Your expenses must have a business connection — that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer. 2.You must adequately account to your employer for these expenses within a reasonable period of time. 3.You must return any excess reimbursement or allowance within a reasonable period of time.” Of course, the minister’s cash compensation, if any, must be reported on Form W-2.

The Deason Rule

Question:

A minister has been using tax preparation software for years. He is paid as a Form 1099-MISC, self-employed pastor. The program sent him to a worksheet which took his Schedule C business expenses and reduced them by a percentage of income attributed to housing allowance. He had never had that happen before. Is there some new regulation or provision in the tax code? Answer:

What the minister is dealing with here is something called the Deason Rule, and it is based on a tax case going back to 1964. The rule applies to clergy who are able to take business expense deductions for unreimbursed business expenses. According to the IRS: “A minister may deduct ordinary and necessary business expenses. However, if a minister's compensation includes a parsonage or housing allowance which is exempt from income under IRC § 107, the prorated portion of the expenses allocable to the tax exempt income is not deductible, per IRC § 265, Deason v. Commissioner, 41 T.C. 465 (1964), Dalan v. C…