December 13, 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 

December 12, 2012

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 the contribution 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 contribution, and
description (but not the value) of non-cash contributions.

"In addition, the timely, written statement must contain one of the following:

statement that no goods or services were provided by the church or religious organization in return for the contribution,
statement that goods or services that a church or religious organization provided in return for the contribution consisted entirely of intangible religious benefits, or
description and good faith estimate of the value of goods or services other than intangible religious benefits that the church or religious organization provided in return for the contribution.
"The church or religious organization may either provide separate acknowledgments for each single contribution of $250 or more or one acknowledgment to substantiate several single contributions of $250 or more. Separate contributions are not aggregated for purposes of measuring the $250 threshold."

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. Upon retirement (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 not classified as housing allowance is income.

(2) After the minister retires (and is no longer providing services to the church), the church can continue to provide him with housing. The Minister Audit Techniques Guide  says "The retired minister may exclude from his/her net earnings from self-employment (SE) the rental value of the parsonage or the parsonage allowance received after retirement. The entire amount of parsonage allowance received is excludable from net earnings from self employment, even if a portion of it is not excludable for income tax purposes. In addition, the retired minister may exclude from net earnings from self-employment any retirement benefits received from a church plan. Rev. Rul. 58-359, 1958-2 C.B. 422."

Thus the church could elect to have the pastor stay in the parsonage after his retirement. The housing would be non-taxable to the minister in this arrangement.

(3) A third option applies to those churches wishing to provide benefits to the pastor after retirement yet are planning on the minister no longer living in church parsonage. In this case, the church could continue to provide compensation after retirement (and is no longer providing services to the church), and simultaneously designating a portion or all of the compensation as housing allowance. Please see citation above under Option 2. This would not be subject to SE tax. For more information, please click on the following link.

December 05, 2012

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.

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 must avoid being a conduit particularly for someone who may otherwise be expected to assist the recipient regardless of a charitable motivation. For example, a father who donates to a church school seeking for the donation to cover his child's education should not be allowed to do so.

The step transaction rule permits the IRS by statute to compress two steps into one if in fact the two steps are for purposes of tax avoidance. Accordingly, the step a wealthy individual takes to process a gift through a receptive church only to have the funds go to an individual not viewed by the church as worthy of its charity is truly to no advantage over simply making a direct gift. The rare exception is when a donor simply wishes to have the church maintain his or her anonymity and accepts the fact that no charitable deduction receipt is forthcoming from the 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 $600 to the missionary throughout the year, than this amount should be reported to each missionary on a Form 1099-MISC. However, most churches find it best to process these contributions through each missionary's mission agency. In these cases no Form 1099-MISC is necessary since the agency is responsible for IRS reporting.

Question 2:

Is the individual missionary required to include the gift in his or her income?

Answer 2:

Yes, amounts received are considered compensation reportable by the individual as income. This is true whether or not the individual received a Form 1099-MISC.