December 13, 2013

Designating a Donation on the Face of a Check

Question:

I have read that donors should not write the name of a missionary directly on their checks to churches or mission agencies.  Rather, they should include it on a separate piece of paper.  I have always believed this to be an urban legend.  Isn't the real issue whether the church or agency has direct control over the gift, and therefore gifts would still be deductible even if the missionary's name was written on the check?

Answer:

You are absolutely correct; this is a myth. While it may give an appearance of impropriety, the question at issue here is not the designation, but rather control over the gift. A designation becomes an issue if it is made in such a way that it serves personal purposes. A donor who writes the missionary's name on the check does not endanger the deductibility of the gift, as long as 1) the missionary has already been identified by the church as a worthy recipient or 2) the church subsequently confirms, of its own volition, that worthiness. In other words, it is (or becomes) the church's decision to support the missionary. As noted earlier, the key in this situation is control. If the church/organization has identified the missionary as a target of support, then the organization is exercising control over those gifts, and they are deductible. 

However, if after making the gift, a donor is still able to direct the use of the funds, the gift is most likely not deductible. A church or mission agency must avoid becoming 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 receive credit for a charitable contribution. 

For more details on this issue, follow the links below:

December 04, 2013

Employer Paying Housing Expenses Directly

Question:

A mission agency runs a school in a foreign country and pays its directors (who are ordained or licensed ministers) a housing allowance as part of their salaries. The ministers avoid income tax on the allowance, but do incur self-employment (SE) taxes. Can the agency pay for the housing directly and correspondingly reduce the salaries of the directors in order to decrease their SE tax burden? 

Answer:


The agency can certainly pay for the housing directly; however, under normal circumstances, this will not decrease the SE tax burden on the directors. Because the directors still receive the housing benefit, even though it is paid directly to the landlord, it will be taxable as a housing allowance. In essence, the total tax will be unchanged since the IRS sees no change in the true nature of the compensation.

Possible exception to the above information:


If paid directly by the agency, the benefit may be non-taxable under very strict guidelines provided by the IRS in Publication 525. According to the Publication, "You do not include in your income the value of...lodging provided to you and your family by your employer at no charge if the following conditions are met: The lodging is


·    Furnished on the business premises of your employer, 
·    Furnished for the convenience of your employer, and 
·    A condition of your employment. (You must accept it in order to be able to properly perform your duties.)"

If these conditions are satisfactorily met, the housing benefit can be excluded from income, and the directors will realize a tax benefit. Publication 15-B provides more information regarding non-taxable housing benefits for an employee.

Federal Court Rules Against Minister's Housing Allowance (Under Appeal)

An important news update that may affect ministries and tax-exempt organizations across the country:

On Friday, November 22, 2013 Federal Judge Barbara Crabb of the Western District of Wisconsin ruled in favor of the Freedom from Religion Foundation (FFRF), declaring the minister's housing allowance unconstitutional. It is important to note, first of all, that this will have no immediate effects. Additionally, only this specific district is affected by the ruling unless it is upheld by a higher court. Presumably, this case will be appealed to the Seventh Circuit Court of Appeals in Chicago, which will rule for Wisconsin, Indiana, and Illinois. Until the Seventh Circuit rules on the appeal, the unconstitutionality ruling will not be enforced.

The specifics of the ruling:

Judge Crabb held that the housing allowance provides benefit to religious organizations and ministers that has no corresponding secular benefit. The provision of a church-owned parsonage as a tax-free benefit to a minister was not ruled unconstitutional. Based on this ruling, only minister-owned housing for which a housing allowance is provided will be affected. As noted earlier, no ministers or organizations will be immediately affected. However, those who may be affected should continue to watch for updates on the final ruling.

For more, follow the links below.

NCLL on Housing Allowance Ruling

ECFA on HA Ruling

FFRF v Geithner: Parsonage Exemption

CapinCrouse Update

November 22, 2013

Memorial Fund Gift for Employee

Question:

A church staff member recently passed away. His wife remains a current employee. If a memorial fund is established for the family of the deceased employee, can the church (her employer) make a non-taxable contribution to the memorial fund, even though it benefits a current employee and her family?

Answer:

Multiple factors must be taken into consideration to determine the taxability of a disbursement of this nature. 

First, the "gift" cannot be disguised compensation, (e.g. previously undisbursed vacation pay for the deceased employee). Even if it is designated by the church as a gift, the disbursement may be taxable as compensation if the IRS deems it to be pay that he was owed for previous services. Additionally, the contribution cannot be made in anticipation of future services by the wife; if this is judged to be simply advanced compensation, it will be taxable.

Also, the church should consider whether contributions of this nature have been a common practice in the past for non-employees. Have gifts been made to memorial funds for non-employee members of the church, or are employees the sole recipients of the contributions? If employees are the typical beneficiaries of gifts of this nature to the exclusion of other church members, this contribution will likely be viewed by the IRS as taxable compensation. 

While these considerations seem to suggest a restriction on gifts of this nature, there are instances when memorial fund contributions for employees will not be taxable. As noted above, there are multiple factors influencing taxability which must be applied to the facts and circumstances of each particular case. While we certainly do not want to discourage gifts of this nature, churches should be aware of these guidelines and make financial decisions accordingly. Memorial fund contributions made in good faith will generally be non-taxable.

It is interesting to note that in the case of the Hokie Fund, established at Virginia Tech University, memorial fund contributions to victims and their families were specifically excluded from tax, regardless of the employment status of the recipients (Public Law 110-141, §1).

November 21, 2013

Small-Employer Healthcare Arrangements

Question:

Our church is a small employer. We currently offer health benefits to two of our pastoral staff. How does the Affordable Care Act affect our church beginning January 1, 2014?

Answer:

The Affordable Care Act (ACA) market reforms will affect almost all employers who provide health benefits to their employees. Each small employer must wisely plan for the changes effective January 1, 2014.


MinistryCPA has researched the ACA on behalf of its small-employer clients in consideration of the organizational and business situations under which they operate. Because each small employer is unique, MinistryCPA works with small employers on a client-by-client basis.

November 17, 2013

Humanitarian Aid as a Business Expense

Question:

I am a missionary in a restricted country, and a large part of my ministry is providing humanitarian and medical aid to individuals. I receive my financial support directly from my church, which issues me a Form 1099-MISC. Can I deduct my humanitarian aid expenses for income and self-employment tax purposes? I have considered using the Schedule C gift deduction, but the $25 per-client limit on deductions is highly restrictive. Also, the nature of the expenses does not seem to fit the IRS guidelines for business gifts.

Answer:

Since IRS Publications do not address every possible category of deductible expenses, general principles must be applied in this situation. IRS Publication 535 describes allowable business deductions: "To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary." 

Based on this definition, humanitarian aid expenses incurred in the course of ministry-based business are deductible, as long as no personal benefit is derived (i.e. none of the expense benefits the missionary or his/her family). These expenses do not fit the definition of business gifts, and should be classified as "other expenses" on Schedule C, or in the case of a Form W-2 employee, should be deducted on Form 2106 as an employee business expense.

November 01, 2013

Housing Allowance on Non-ministerial Income?

Question:

As the minister of a small church, I receive no compensation. I do, however, work a secular job for which I am compensated, and I use the earnings from this job to cover my housing expenses. Can I apply to the IRS for a housing allowance designation of this income?

Answer:

Unfortunately, no. According to IRS Publication 517, "The church or organization that employs you must officially designate the payment as a housing allowance." A housing allowance is designated by your employer, not the IRS, and is available only on income from ministerial services.

Stadium Parking Income for a Church...Continued

Question:

We recently answered a question related to a church opening its parking lots for patrons of a nearby football stadium in exchange for donations (read the previous post here: Stadium Parking Income for a Church). In relation to that situation, a reader asks why the church may be subject to UBIT (unrelated business income tax) if the work is performed by volunteers.

Answer:

The question references an exception to UBIT in IRS Publication 598, which states, "Any trade or business in which substantially all the work is performed for the organization without compensation is not an unrelated trade or business." Again, please reference our earlier post for more on the specifics of an unrelated trade or business. 

This exception would seem to include the situation under consideration, but the phrase "substantially all the work" is extremely important in determining whether income is exempt. This issue was addressed in IRS Letter Ruling 982206, issued January 29, 1998. M, a tax-exempt organization that received income in return for providing space for the storage of camping trailers, felt that it should not be subject to UBIT on this income because the vast majority of the work was performed by volunteers. Both M and the IRS agreed that the income itself would be subject to UBIT, but M contended that the volunteer exemption should apply. However, according to the ruling, "the exclusion from unrelated  business income for volunteer labor under section 513(a)(1) of the Code is only applicable when the activity performed by the volunteers is a material income producing factor in carrying on the activity." In this case, the IRS held that the payments ("donations" in our question) were "for the use of the facility over a period of time rather than the minimal services attendant with the movement of the units into and out of the building." In essence, the patrons were paying for the use of the space, not for the minimal services performed by the volunteers, including services to collect monies paid for the use of the facilities

The application to our question is clear: in the situation presented here, where the use of the space is the primary, regularly conducted service provided in exchange for payment, the work performed by volunteers is not substantial enough to provide for exemption from UBIT.

October 23, 2013

MinistryCPA Special Topic: Social Security Benefit Calculation (Part 2 of 2)

Question:

Having just turned 60, I am in the process of planning my retirement, so I would like to get an idea of how much I can expect for Social Security benefits each month. Can I simply apply a percentage to my average monthly wages over my working life to get an estimate? If not, how does the Social Security Administration (SSA) calculate my monthly benefit?

Answer:

In our last post on Social Security, we discussed calculation of the average indexed monthly earnings (AIME), which is the basis for monthly benefit calculation.The SSA uses the term "primary insurance amount" (PIA) to denote the monthly benefit available to an individual at full retirement age (FRA). PIA is calculated based on two different "bend points" determined by the SSA. Each year, the bend points are adjusted based on the same national average wage index used to index for AIME purposes. Up to the first bend point, retirees receive 90% of their AIME. This provides a first level of significant retirement benefit. The amount of AIME beyond the first bend point which is translated into retirement benefits is significantly less.

For 2013, the first bend point is $791, and the second is $4,768. The PIA is equal to the sum of:
  • 90% of AIME up to the first bend point ($791)
  • 32% of AIME up to the second bend point ($4,768)
  • 15% of AIME beyond $4,768
up to a maximum of $2,533* per month for 2013. The maximum PIA is also adjusted each year by the SSA.

Let's consider an example: assume an individual has a calculated AIME of $6,000. To determine the PIA, multiply the first $791 by 90% to get $712. Then, multiply $3,977 (the difference between the first and second bend points) by 32% to get $1,273. Finally, multiply $1,232 (the difference between the second bend point and $6,000) by 15% to get $185. Add $712, $1,273, and $185 to arrive at the PIA of $2,170. Keep in mind that the SSA will apply cost-of-living adjustments (COLAs) to adjust the PIA for inflation and other economic factors. he amounts projected here are for individuals planning to begin collecting benefits at FRA.

For more, visit the Primary Insurance Amount page on the SSA website. Also, see previous posts on Social Security by clicking "Social Security" in the "Categories" section on the blog's sidebar.

*2013 PIA cap information from Forbes.com.

October 19, 2013

MinistryCPA Special Topic: Social Security Benefit Calculation (Part 1 of 2)

Question:

Having just turned 60, I am in the process of planning my retirement, so I would like to get an idea of how much I can expect for Social Security benefits each month. Can I simply apply a percentage to my average monthly wages over my working life to get an estimate? If not, how does the Social Security Administration calculate my monthly benefit?

Answer:

Unfortunately, the process is more complicated than that; you can access a monthly benefit projection by creating an account on the SSA website. Benefits are based on Social Security earnings; that is, only earnings that have been subject to Social Security tax are used in the calculation of benefits. Additionally, the SSA uses a number called averaged indexed monthly earnings (AIME). This number is important in that it forms the basis for calculation of monthly benefits. 

AIME is calculated based on the 35 highest years of Social Security earnings for an individual. For example, an individual born in 1948 whose earnings grow steadily each year from 1966-2015 will not have an AIME based on the full 50 years, but on the highest 35. At first glance, it seems obvious that the most recent years will be the highest; however, the SSA introduces one more variable. Each year's earnings (for example, 1976) are indexed (multiplied by a factor based on average wages for 1976 compared with the year the individual turns 60-in this case, 2008). This essentially converts 1976 wages to 2008 dollars. Any wages this individual earns after 2008 will not be indexed. 

Once each eligible year has been indexed, the top 35 wage years are added together and divided by 420 (the number of months in 35 years). The resulting number is the individual's AIME, which will then be used to calculate benefits. In our next post on Social Security, we will discuss calculation of benefits using AIME.

As is the case with our other posts on this topic, individuals who are disabled or eligible for survivor's benefits may be subject to different guidelines.

For more on this topic, visit the AIME page on the SSA website.

October 16, 2013

Gifts Paid as Part of Expense Reimbursement Plan

Question:

Are reimbursements for gifts of a non-religious or benevolent nature allowed under an accountable reimbursement plan for a church? For example, could a pastor who purchases flashlights for the members of a Sunday School class be reimbursed?

Answer:

Gifts are a normal business expense, and are clearly addressed by IRS Publication 463: "If you give gifts in the course of your trade or business, you can deduct all or part of the cost." As such, they are allowable as expenses to be reimbursed if they satisfy the requirements of that publication. However, according to the publication, "You can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year."

For more details, see  IRS Publication 463.

October 11, 2013

Church Payment for Summer Camp Expenses

Question:

What are the implications of a church using monies from the general fund to sponsor the children of its members to attend a Christian summer camp? Could the church also pay for staff members' children to attend?

Answer:

Many churches use monies from either the general fund or a designated "Camp Scholarship" fund to help families who do not have the financial resources to send their children to a Christian camp. This benevolence is deductible to the donors and non-taxable to the recipients. Churches must be careful to avoid becoming a "conduit" for re-characterizing a donor's payment of a personal obligation as a contribution to the benevolent fund. For example, while the church may offer scholarships to send children to a Christian camp, it should not accept a family member's contribution with the designation that it be forwarded to one of his or her own family members.

Gifts to staff members are taxable. However, if the church as a whole initiates benevolence for the purpose of sending children to camp, the fact that one of the children has a parent who is a staff member does not automatically make the gift taxable to the staff member. Churches must be extremely cautious, as this can be viewed as disguised compensation, especially if it is a regular occurrence and gives preference to staff members' children.

In some cases, churches may believe that Christian summer camp is an essential experience for the children of members. If a program is instituted with the genuine objective of educating children in Christian teachings through summer camp, it is our belief that a church could sponsor the children of members with no tax consequences.

Stadium Parking Income for a Church

Question:

A church located next to a football stadium opens its parking lot to fans on Saturdays when the team has a home game. This happens about half a dozen times each year, and the parking lot is manned by volunteer church members. Parking is free, but the volunteers do solicit donations. Does this arrangement affect the church's tax-exempt status? How much control can these volunteers have over the church's use of the donations?

Answer:

First, this situation will not affect the tax exempt status of the church. Non-ministry related sources of income, although they do not affect the tax exempt status of the church, may be subject to unrelated business income tax (UBIT). According to IRS Pub. 598, churches may be subject to UBIT on "income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity." This activity clearly meets all the criteria of the IRS definition, which subjects unrelated business income to tax, except possibly in the area of being "regularly conducted." IRS Code Section 513-1(c)(2)(i) addresses this issue:
Where income producing activities are of a kind normally undertaken by nonexempt commercial organizations only on a seasonal basis, the conduct of such activities by an exempt organization during a significant portion of the season ordinarily constitutes the regular conduct of trade or business. For example, the operation of a track for horse racing for several weeks of a year would be considered the regular conduct of trade or business because it is usual to carry on such trade or business only during a particular season.
Because the church opens its parking lot each time the stadium lots are open, the church is likely viewed as conducting its business regularly during the season in which comparable nonexempt commercial entities are engaging in the same business. Although the activity is not conducted year round, the church takes advantage of the opportunity whenever it is available. Based on these considerations, the church will most likely be subject to UBIT on this income. Expenses directly incurred in the production of this income may be deducted in the computation of UBIT.

The church should also carefully consider the amount of control allowed to the volunteers over the funds. Excess control by the volunteers could be viewed as disguised compensation if their influence produces personal benefit.  Rather than giving them direct influence on the use of the funds, the church should allow them input into the decisions of the committees that "control" the designation of funds.  

September 30, 2013

Small Business Health Care Tax Credit Changes


Question:

Our church has filed for the Small Business Health Care Tax Credit since 2010. Are there any changes in this credit for 2014?

Answer:

Yes, the IRS has released proposed regulations that will change the requirements for any small business or eligible tax-exempt organization desiring to claim the credit.  The proposed regulations include the following:
  • The employer must obtain and pay premiums through a Small Business Health Options Program (SHOP) Marketplace, which is an exchange to be established under the Affordable Care Act for small businesses.
  • The maximum credit increases for small businesses to 50% (from 35%) and for eligible tax-exempt organizations to 35% (from 25%).
  • There is a two-consecutive year filing limit beginning with tax year 2014. Meaning, if the employer files for 2014 and 2015, the employer may not file for 2016. Claiming the credit for prior periods (2010 through 2013) is not included in the two-consecutive year filing limit.
  • Transitional rules are available for employers having a non-calendar-year health insurance plan.
Eligible tax-exempt organizations will continue to claim the credit on Form 8941 and attached to Form 990-T. Read the Proposed Regulations for more information.

September 25, 2013

MinistryCPA Special Topic: Social Security Spousal Benefits

Question:

I feel that I have a good grasp on the details of my retirement benefits and have reached full retirement age (FRA), but my wife and I have decided that I should wait to retire until age 70 in order to receive delayed retirement credits (DRC). However, my wife would like to begin receiving monthly benefits. I have heard the term "spousal benefit" in the past, but am not sure how that works. Can my wife collect some sort of benefits on my record?

Answer:

Short answer: yes!

Under the rules of Social Security, the spouse of a worker who delays retirement until age 70 in order to receive DRCs (increased retirement benefits after one has reached FRA) can collect benefits on the working spouse's record. This will not affect the amount of benefits that the working spouse can collect once he or she elects to begin receiving benefits. A non-working or low-wage spouse should consider choosing the spousal benefit.

In order to accomplish this, the working spouse who posed the question here, once reaching FRA, must file and suspend his or her benefits; the other spouse can then file for spousal benefits. The spousal benefit will equal one-half of the working spouse's benefit at FRA, reduced by any applicable penalty for initiating benefits prior to the non-working spouse's FRA (more on FRA and when to file: When Can I Start Receiving Social Security Benefits?).

As is the case with our other posts on the topic of Social Security, you should consult your financial advisor to determine the best course of action for you and your spouse. Individuals who are disabled or eligible for survivor's benefits may be subject to different guidelines.

Source: Retirement Planner: Benefits For Your Spouse