May 02, 2012

Missionary Support: Agency or Local Church

Question:

Independent missionaries are occasionally invited to our church for events. For the services provided, they are given honorarium. However, sometimes, the church mission board decides to provide one-time support for the missionary and the money is disbursed from the mission fund. Does this mean that the church has to assume the role of a missionary agency and require accountability and reporting for this sum of money in the following months?


Answer:

A church that supports an independent missionary will need to issue him or her a Form 1099-MISC at the end of each year, reporting all distributions (assuming they amount to at least $600). This is not necessary for missionaries commissioned by or associated with recognized missions agencies and who receive W–2 or 1099 forms directly from their missions agencies. In order to issue a Form 1099-MISC, a church will need to know the missionary’s address and social security number. This information can be obtained by having the missionary complete and submit IRS Form W–9 prior to any distribution.


The members of my Federal Taxation I class at Maranatha Baptist Bible College in Watertown, Wisconsin have taken on the challenge of study and research to answer posted questions. Jeremy Mattson of Green Bay, Wisconsin gets credit for this one.

Missionary Honoria--Not Administered by Agency


Question:

I am working as a missionary in West Africa and am considered an unordained employee of my missions agency. I receive a Form W-2 each year to file my taxes. This year, while I was on home service, my home church took an extra offering and decided to give it to me as a gift rather than send it to our main office. Is this taxable and, if so, where do I report it on my Form 1040?


Answer:

Yes, this gift is considered taxable compensation for your services as a missionary. You should report it on a Schedule C as self-employment income.


The members of my Federal Taxation I class at Maranatha Baptist Bible College in Watertown, Wisconsin have taken on the challenge of study and research to answer posted questions. Jeremy Mattson of Green Bay, Wisconsin gets credit for this one.

May 01, 2012

Benevolence Extended to Employee: Taxable?

Question:

My church set up an adoption fund to help members that are willing to adopt children. Two of the members that have answered this call are church employees, one is an administrative employee and the other is a pastor. Are funds paid out of this fund taxable to the employee?

Answer:

Benevolent activities of the church may benefit members of the church or community who are also employees as long as they are not disguised forms of compensation. Benevolent disbursements are not considered taxable income to the recipient since they are not compensation for services rendered to the church. The church should establish clear parameters for eligibility to receive benevolence; employment status with the church must not influence the procedures for receipt of benevolence.

The members of my Federal Taxation I class at Maranatha Baptist Bible College in Watertown, Wisconsin have taken on the challenge of study and research to answer posted questions. Julia Doerstling of Lantana, Texas contributed to this posting.

No Charitable Deduction for Contributed Services

Question:

A church rents space for its ministry from a generous landlord. Is it able to give its landlord an in-kind contribution statement for a portion of its monthly lease? For example, its monthly lease payment is only $4,000 on a property with a fair market rental rate of $5,000. The landlord wants to contribute $1,000 per month for one year. Could the church give him a charitable contributions statement for $12,000?

Answer:

According to IRS Publication 526, “you cannot deduct the value of your time or services.” Since rent is considered a service, no deduction is permitted.

The members of my Federal Taxation I class at Maranatha Baptist Bible College in Watertown, Wisconsin have taken on the challenge of study and research to answer posted questions. Julia Doerstling of Lantana, Texas contributed to this posting.

Housing Allowance Reported on Form W-2?

Question:

If I am exempt from social security tax (Form 4361 approved) does what the church paid me in housing allowance need to reported on the Form W-2 the church issues me?

Answer:

Whatever the church pays you in housing allowance is not required to be reported on Form W-2. However, it is advisable, since the minister must compare the housing allowance amount to his actual expenses and to the fair rental value of his home (plus actual cost of utilities) in order to determine whether the housing allowance amount is fully excludible from income. Also, because housing allowance is not exempt from self-employment tax (it only reduces income tax), ministers who are not exempt by virtue of an approved Form 4361 application must report their housing allowance on Schedule SE on their personal tax returns.

The members of my Federal Taxation I class at Maranatha Baptist Bible College in Watertown, Wisconsin have taken on the challenge of study and research to answer posted questions. Julia Doerstling of Lantana, Texas contributed to this posting.

Church Reimbursing for Personal Expenses of Missionary

Question:

A church has a member who goes on a missionary trip every year. The church wishes to support him by paying for housing and travel expenses. What would be the best way to handle this so the donations are tax deductible to donors? Can the church member who is the missionary donate to the fund? Will this be income to the missionary?

Answer:

According to the Tax Code section 170(c)(1), the term “charitable contribution” refers to a donation to a church or other organization with the intent of the church having sole priority over the funds.

A church member may designate a specific contribution to an individual, but will not receive a deduction for it. Richard Hammar states “According to Revenue Ruling 62-113 a deduction will be allowable where it is established that a gift is intended by a donor for the use of the organization.” The IRS is concerned with “who has the say” over the money. If donors designate funds to a church and tell it specifically how to use the money, they are forfeiting their deductions. If a donor designates funds to a church and allows the church to decide how to use them, then it is deductible. The church is off to a great start by creating a fund because it shows that it has control and discretion over the funds. One way to contribute is to have a special offering for the missionary, but it is also acceptable for the members to designate their checks to the church controlled fund.

According to section 61 of the Internal Revenue Code, “Gross income includes all income from whatever source derived unless excluded by law.” A missionary is performing service for the church. If the missionary is reimbursed or directly paid by the church for personal, non-business expenses, then the church is compensating him for personal expenses that are includable in gross income for Federal tax purposes. Any business expenses that the church reimburses will not be gross income to the missionary.

Rather than contributing to the church fund, the missionary who is able to use his own funds, in part, to pay for mission activities should do so directly. To the extent that these costs relate to allowable business expenses, he can reduce his taxable income accordingly.

The church should reference other postings to this blog to assess whether the missionary is an employee (issue Form W-2 at year-end) or an independent contractor (Form 1099-MISC).

The members of my Federal Taxation I class at Maranatha Baptist Bible College in Watertown, Wisconsin have taken on the challenge of study and research to answer posted questions. Jonathan Panlilio of San Diego, California gets credit for this one.

Interest-Free Loans to a Church

Question:

Could a church borrow from church members at a 0% interest rate? Do “imputed interest” rules apply to such loans? Is there any limitation that a church member needs to be aware of before loaning funds to the church under these conditions?

Answer:

Churches considering such alternatives for financing are well advised to consult with an attorney experienced in local state securities laws, since non-tax law issues may be more pertinent than tax considerations.

But, yes, a church could potentially receive loan(s) from church members with a 0% interest rate. This type of loan is usually classified as a below-market gift loan. The member-lender in a sense is transferring an annual amount equal to the forgone interest to the church-borrower as a gift. The church-borrower, however, simultaneously transfers such interest back to the member-lender. This is the idea of imputed interest.

Were it not for exceptions, a donor would report equal amounts of the foregone interest as taxable interest income and as a charitable contribution.

Commerce Clearing House’s Master Tax Guide, lists an applicable exception: “… in the case of gift loans between individuals (gift loans between individuals and charities are not discussed) where the total amount outstanding does not exceed $100,000, the amount deemed transferred from the borrower to the lender at the end of the year will be imputed to the lender only to the extent of the borrower's annual net investment income ( Code Sec. 7872(d)). If such income is less than $1,000, no imputed interest is deemed transferred to the lender.” Presumably, the church-borrower will have little net investment income since donors are unlikely to be motivated to grant interest-free loans to ministries that simply invest gift loan money in stocks, bonds or other investment property.

The members of my Federal Taxation I class at Maranatha Baptist Bible College in Watertown, Wisconsin have taken on the challenge of study and research to answer posted questions. Lisa Collogan of Des Moines, Iowa gets credit for this one.