January 31, 2013

Church Support of Non-501(c)(3) Organization

Question:

A church has supported a children's ministry for several years which has recently lost its 501(c)(3) exemption. The leaders of the ministry are not employees of the church, and the ministry provides no services directly to the church. Is there any reason why the church cannot continue to give financial support to the children's ministry?

Answer: 


This issue is tricky. A church may support other 501(c)(3) organizations; however, churches must be careful when they attempt to support non-501(c)(3) organizations. 

Since the organization has lost its exempt status, the disbursements are no longer from one 501(c)(3) to another 501(c)(3); disbursements of this type are not subject to Form 1099-MISC or other reporting. 

Now that the disbursements are made to a taxable entity, they will likely be viewed as payments for services rendered. The supporting church therefore may be required to issue Form 1099-MISC. The church should research whether filing Form 1099-MISC would be required. For example, payments to non-employee individuals for services rendered are subject to Form 1099-MISC reporting.

For more information read the following previous blog posting:
Church Worker Employee or Independent Contractor

Disbursements to Foreign Nationals for Missions

Question: 

Last year a 501(c)(3) ministry in Africa collected and distributed funds to two nationals as conduits to their tribes in Africa for drinking water, Bibles, and other essentials.  Does this need to be reported on a Form 1099-MISC or other IRS form?

Answer:

Based on the question as it was posted, it does not appear that the African nationals were providing services to the donor organization. Accordingly, it would not be income reportable on Form 1099-MISC or Form W-2.

However, these types of disbursements can be misread as disguised compensation, raising suspicions that the monies were disbursed as compensation for services instead of for benevolent purposes only. 

Preferably, the funds should be disbursed by the 501(c)(3) donor ministry to another 501(c)(3). For example, a US mission agency that sponsors a missionary in Kenya may disburse these funds to the missionary to be used for the benefit of the tribes in Kenya. This would most likely be viewed as a legitimate business expense of the ministry in Africa and not as disguised compensation.

January 24, 2013

Form 1099-MISC for Missions Support

Question:

Should the following items be included on Form 1099-MISC?
1. Checks to visiting pastors and missionaries from congregational love offerings 

2. Medical insurance coverage for pastors
3. Mission support from church fund to missionaries 


Answer: 

1. These amounts are reportable on Form 1099-MISC if the total amount given to the non-employee (visiting pastor or missionary) for the year totals at least $600.

2. Medical insurance coverage for pastors (who are properly classified as employees) are not reportable on Form 1099-MISC. For employers filing 250 or more Form W-2s, employee medical insurance is reported as Code DD in Box 12 of the W-2. At least for 2012 (W-2s prepared by January 31, 2013), employers with fewer than 250 employees are not required to report these amounts. IRS Issues Interim Guidance on Informational Reporting of Employer Sponsored Health Coverage
  
3. Mission support paid directly to another 501(c)3 organization (e.g. a mission agency) is not reportable on Form 1099-MISC. However, compensation given directly to a missionary from a church's mission fund is reportable to the missionary on Form 1099-MISC if the amounts total $600 or more for the year. These amounts would be reported on Box 7 of the Form 1099-MISC.

Maximizing Retirement Contributions without Violating Non-Discrimination Rules

Question: 

Our church would like to increase our contribution towards our senior pastor's retirement funds but are not sure what is the most tax efficient way to do so.  We currently give 5% of all our employees gross wages towards a SEP IRA but we'd like to add additional funds for just the senior pastor.  Can you provide any suggestions?

Answer: 

Perhaps the most common way that employers overcome the non-discriminatory rules that confront this situation is to enable employees to make elective deferrals under a “Salary Reduction Agreement.” This permits a more highly compensated employee to defer a significant portion of that higher compensation into a qualified retirement plan. 

Since SEP IRA plans are funded only by the employer, the church in the situation cited here should consider whether an alternative plan should be adopted. For many churches this has meant that they adopt an Internal Revenue Code Section 403(b) plan.

Missionary: "Everything I spend is related to my ministry."

Question: 


What business expenses can missionaries count to reduce taxable income? Many missionaries feel like their whole life is doing "ministry", therefore they think most expenses are "business" expenses when overseas (such as food, clothing, travel, housing). When a missionary is on furlough (stateside assignment) are their expenses in the states considered business expenses?

Answer: 

Almost any business expense permitted for a business owner is also permitted for missionaries. Missionaries whose work requires them to incur expenses as part of their work may deduct any qualifying work expenses. Read IRS Publication 535 for a full explanation of business expenses. Typically, food, clothing and permanent housing in a foreign country are not business expenses. However, local transportation associated with mission work is deductible.

Travel during furlough involves a detailed understanding of “travel away from home” rules which are more extensive than can be rehearsed in this blog entry. In our experience, well established mission agencies are usually better qualified to assist missionaries with business expense reporting than a missionary on his/her own. Therefore, our advice for missionaries is to check with their mission agency.

January 22, 2013

Excess Housing Allowance Expenses-Can They Be Carried Over to Next Year?

Question:

A pastor decided to upgrade his kitchen but did not modify his housing allowance for that year. Can he use those expenses in figuring the upcoming year's housing allowance?

Answer:

Since the upgrades were made in the current year, the expenses will be included in the current year's housing allowance calculation, and cannot be taken out of the next year's housing allowance. When determining the housing allowance for any given year, it is important that the pastor consider any new additions. A quote from the link provided below helps explain this situation:

“A housing allowance must be included in the minister’s gross income in the taxable year in which it is received to the extent that such allowance is not used by him during the taxable year to rent or otherwise provide a home or exceeds the Fair Rental Value of the home including furnishings and appurtenances such as a garage and the cost of utilities.” Ministers Audit Techniques Guide

Since there is generally no consequence for overestimating a housing allowance allocation of one's ministry compensation other than being required to report the excess as taxable compensation, it is usually best to anticipate potential projects such as the one cited in the Question.

Donations to Special Speakers and Honorariums to Non-Citizens

Question 1:

Can donations made by an individual to a special speaker hosted by the church be included in that individual's statement of donations?

Answer 1:

Since the church is acting corporately as the entity engaging the services of the guest speaker and compensating him accordingly, the donations will be tax deductible for the individual donors, and thus may be included in the individual donor’s giving statement. This is not considered a situation in which one individual is simply giving a personal gift to another--a non-deductible activity.

Question 2:

How should a church report a honorarium to a special speaker who does not have a Social Security number (a non-U.S. resident), since the church cannot give the special speaker a Form 1099-MISC?

Answer 2:

This is a very difficult issue for a local church to deal with. It is safe to say that compensating individuals who do not have a legal right to work in the U.S. must be avoided. 

Churches that host special speakers from foreign mission fields may be wise to defer to the mission agency sponsoring such guest speakers therefore, any support raised may best be distributed to the mission agency, instead of the speaker, for its handling.

If a foreign individual accompanies a U.S. missionary to a local church, it may be best to compensate the missionary instead of his or her guest. This assumes that the missionary is predominantly the one supported by the church to represent it on in a foreign country and that the guest is simply accompanying the missionary to better "tell the story."

January 15, 2013

Church Annual Filing Requirements

Question:

What documents must a church file at the end of the year?

Answer:

Typically, churches are not required to file the Form 990 and schedules that most non-profit organizations must prepare.

Year-end payroll reports most commonly encompass the following list:
  • Form W-2, Wage and Tax Statement
  • Form W-3, Transmittal of Wage and Tax Statements
  • Form 941 (or annual Form 944, if consent is gained from the IRS), Employer's Quarterly Federal Tax Return
  • Many states require reports for income tax withholding from employees and annual wage and tax statements
  • Form 1099-MISC, Miscellaneous Income (for payment of services to non-employee individuals in excess of $600 per year)
  • Form 1096, Annual Summary and Transmittal of U.S. Information Returns

Church Audit Required?

Question: 

When is it necessary for churches to have their accounts externally audited by CPAs? Is that up to the church or is there some regulation that requires one?

Answer:
Generally, churches are not required by law to secure a periodic or annual audit opinion by an independent CPA firm. However, it may be within the church’s best interests to do so. Typically, larger churches are more able to incur the cost of an audit.

Further, many churches that are members of the Evangelical Council for Financial Accountability (www.ECFA.org) are required to secure annual independent audits.

Keep in mind that a church’s governing documents, or a bank from which a church has acquired a loan may require a church to secure an audit opinion.

$250 Threshold for Contribution Reporting--Explanation

Question:

"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."

Does this mean that in recording and giving tax deduction statements for tithes and offerings that only individual gifts exceeding $250 are tax deductible, and that only those individuals gifts exceeding $250 are totaled for tax deductible purposes? So, a family that gives $50 a week cannot count any of that giving as a deduction?

Answer:

No; any amount given to a charitable organization is tax deductible. 

The quote in the question above is from a section of Publication 1828, explaining that donors who donate $250 or more in a single contribution must have “a contemporaneous, written acknowledgment of the contribution from the recipient church or religious organization” in order to claim a deduction for this donation. This is not saying that donations less than $250 are not deductible, simply that donations of $250 or more must be documented in order to be deductible.

The quote above also explains that donations of less than $250 are not combined to reach the $250 threshold.

See page 24 of Publication 1828 (Publication 1828) for a full explanation of how churches should report donations.