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Showing posts from February, 2013

Church Rental of Home to Employee

Question:

If a church owns a home, separate from the parsonage, and would like to lease it to one of its employees, are there any rules the church should be aware of? How will this affect the church's exempt status?

Answer:

A November 14, 2012, blog post addresses this question. 

http://ministrycpa.blogspot.com/2012/11/church-renting-building-unrelated.html

Based on our experience, real estate tax assessors in most municipalities have not considered the use of a tax-exempt church home by a church employee to be a violation of the church's tax-exempt purposes. Therefore, the property has typically not been placed on the municipal real estate tax rolls. The church is well advised to inquire with the local municipality assessor for his or her interpretation.

Correcting Minister's Erroneous Form W-2

Question:

A church figures its pastor's compensation package by budgeting a gross amount and allowing its pastor to allocate that amount into salary, housing allowance, health insurance premiums, etc. Salary and housing allowance are paid directly to the pastor in one bi-weekly check, while health insurance premiums are paid by the church on the pastor's behalf, with the amount essentially deducted from the gross compensation amount.

After receiving his Form W-2, the pastor noticed that all of his income (including housing allowance, health insurance premiums, etc.) was reported as a single amount in box 1.

Is there any circumstance under which all of his income should be reported in box 1 of Form W-2? If not, how can the church correct this situation?

Answer:

We recommend that a minister's housing allowance be reported on his Form W-2 in box 14 with the description "Housing Allowance." For 2012, health insurance premiums for small employers were not required to be…

Self-Employment Tax on Housing Allowance

Question:

Is a minister's housing allowance included in his calculating of self-employment tax?

Answer:

Yes, a minister's housing allowance is included in the computation of Self-Employment tax.

The calculation for self-employment income on Schedule SE is as follows:
ADD: Cash compensation to minister
ADD: Housing allowance (or fair rental value of parsonage)
SUBTRACT: Form 2106 expenses

Deducting a Minister's Health Insurance Premiums

Question:

Can a minister with a valid Form 4361, deduct health insurance premiums that he paid on line 29 of form 1040?

Answer:

Ministers use Form 4361 to claim exemption from tax on self-employment income. A minister is an employee in every respect, except for purposes of the self-employment tax. The health insurance premium deduction relates only to self-employed business owners and is not available for employees.

Form 1040 Instructions state that in order to deduct insurance premiums on line 29 of Form 1040:

"One of the following statements must be true.
You were self-employed and had a net profit for the year.You were a partner with net earnings from self-employment.You used one of the optional methods to figure your net earnings from self-employment on Schedule SE.You received wages in 2012 from an S corporation in which you were a more-than-2% shareholder. Health insurance premiums paid or reimbursed by the S corporation are shown as wages on Form W-…

Tuition Payments for an Intern

Question:

A young person attends a Bible college and volunteers at his local church during the summer and school holidays. Can the church make a payment toward his college tuition without it being taxable to him?

Answer:

If the church above were to make a payment towards their young person's school bill, it would be considered compensation for services which the young person had performed while working at the church. The payment would have to be reported to him as taxable income. If it is determined that he was an employee, then the church would need to file a Form W-2 (typically subject to FICA tax employee withholding and employer matching); if it is determined that the young person was an independent contractor, than the church would have to file Form 1099-MISC if the payment was $600 or more.

A 2008 blog post, while it deals with a slightly different version of the above post, can be consulted for further help with this issue:


http://ministrycpa.blogspot.com/2010/08/taxability-of-i…

Travel for Mission Trip Deductible as Charitable Donation

Question:

A church regularly sends out teams on short term mission trips. They have set up a special fund for receiving special offerings and for reimbursing travel, meals and lodging expenses. Recently, a team was required to pay the hosting organization a fee for each member to cover meals and lodging. The team leader "required" each team member make a donation to the fund in the amount of the fee. Are these donations tax deductible?

Some argue that the team members are receiving a benefit from the donation and should not receive a tax benefit for the donations. Others feel they should because the "benefit" they receive doesn't seem to be in the same class with the IRS examples of tickets to sporting events, dinners, materials received from auctions, etc. Plus, cannot these expenses be deducted on the individual's Schedule A as out-of-pocket contributions if the church doesn't consider them a donation?

Answer:

Publication 526 says, "Generally, you ca…

Benevolent Fund Giving and Disbursement

Question:

A donor recently gave an offering marked for “Benevolence.” The donor had notified the pastor prior to giving the gifts and had told the pastor to use it at his discretion.

The pastor in turn used the money to buy things for a family of the church in need.

Is the gift tax deductible to the donor, or non-deductible, because it is a gift to an individual and not to a tax-exempt organization?

Answer:

Since the donor does not appear to be directing the contributions for some non-charitable purpose and since the funds are under the total discretion of the church to fulfill its biblical responsibilities, the contribution is deductible.

But church leaders are well advised to use a committee of trusted and confidential members/leaders to protect the pastor from accusations of favoritism or of directing benevolence to employees or volunteers as disguised compensation.

Several relevant blog posts are provided below:

Benevolent Fund Review

Church as a Conduit for Non-Deductible Gifts

Church Ben…

State Taxes for Missionaries

Question:

Is a missionary couple, whose time in the U.S. usually consists of fund raising, speaking to donors and churches, and spending time with family, responsible for paying state taxes for the time spent in the U.S.?

Answer:

First, all U.S. citizens are subject to taxation on their worldwide income regardless whether it is earned while in the U.S. or earned abroad. State tax laws vary. Several do not have state income taxes. Others allow the federal earned income exclusion or have other rules to limit taxable income for state residents living in a foreign country.  However, time spent in the U.S. will limit a missionary's foreign earned income exclusion.

The federal guidelines that many states use may be expressed as following:

"The maximum amount of foreign earned income that may be excluded is $95,100 for calendar year 2012 (Rev. Proc. 2012-40). The exclusion is computed on a daily basis. Therefore, the maximum limit must be reduced ratably for each day during the calendar…

Travel Expense Reimbursement to Special Speakers

Question:

Is payment of airfare, hotel expenses, etc. considered taxable income to special speakers? How should these amounts be reported?

Answer:

Compensation to non-employees is reportable on Form 1099-MISC in box 7. According to theInstructions for Form 1099-MISC, the amounts mentioned in the question above are examples of payments which may be reportable in box 7 of Form 1099-MISC:

Reportable as taxable income:

"A fee paid to a nonemployee, including an independent contractor, or travel reimbursement for which the nonemployee did not account to the payer, if the fee and reimbursement total at least $600 [is reportable in box 7]. To help you determine whether someone is an independent contractor or an employee, see Pub. 15-A." IRS Publication 463 affirms this interpretation.

NOT reportable as taxable income:

However, if the special speaker does account for his expenses in accordance with the documentation requirements of Publication 463, then the reimbursements may be excluded f…

Form 1099-MISC Erroneously Issued for Benevolent Gift

Question:

A church issued a Form 1099-Misc for a $5,000 gift given to an individual that suffered a life threatening accident to help her with therapy costs. Is this correct? Should this gift be taxable at a regular rate?

Answer:

Form 1099-MISC is used to report compensation to individuals not under the employ of the issuing organization. If no services are or will be required for the $5,000 benevolence gift listed in the question above, then this amount should not be reported on Form 1099-MISC and will not be reported as taxable income by the recipient. According to IRS Publication 525, gifts to individuals not in the employ of the donor are non-taxable. A corrected Form 1099-MISC should be prepared immediately.

For more blog posts on benevolent gifts, readers should follow the links provided below:

Form 1099-MISC for Benevolent Gifts?


Benevolent Gift Rules Review


Benevolence NOT Reportable on Form 1099-MISC

Fringe Benefit to Teachers of Christian Schools: Children's Education

Question:

A church has a school affiliated with it and part of the compensation for the teachers is free tuition for their children. Is this a taxable fringe benefit? If yes, is the school required to pay FICA tax on the value of the tuition?

Answer:

According to the IRS's Taxable Fringe Benefit Guide,

"Free or reduced tuition for employees of educational institutions may be excludable to employees. The term "qualified tuition reduction" means a tax-free reduction in tuition provided by an eligible educational institution. At the undergraduate level, the education need not be at the same institution where the employee works. Whether a tuition reduction is a qualified tuition reduction, and therefore excludable from income, depends on whether it is for education below or at the graduate level. The qualified tuition reduction must not represent payment for services." (An important point that we will address below).

Further, "a qualified educational organization …

MinistryCPA Special Topic: Year-End Giving Statement Wording

Have you looked at your ministry’s contribution report recently? Does it include the required IRS statement, “No goods or services were provided in exchange for your contribution”? IRS code Sec. 170(f)(8) provides that, to be deductible, a money contribution of $250 or more must be substantiated by a contemporaneous written acknowledgment by the donee organization that indicates the amount and whether the organization provided any goods or services in consideration for the contribution and, if so, a good-faith estimate of their value. In 2012, a couple’s charitable contribution of more than $22,000 was disallowed due to the omission of the statement, “No goods or services were provided in exchange for your contribution.” Although canceled checks and the church contribution report were produced during audit, the lack of the key phrase resulted in disallowance of the deduction and a higher tax bill for the couple.
If your ministry has already distributed incorrect contribution statements, …

MinistryCPA Special Topic: QuickBooks Year-End Giving Statements

Quickbooks Pro and QuickBooks Premier are great tools in helping churches stay on top of their finances. However, one setback with this software is that it does not come with a pre-installed year-end donor contribution report feature. A church which uses QuickBooks has two options, then, to prepare these statements: Install an add-on to QuickBooks which will accomplish this task.Use a separate, outside program to track donor giving.MinistryCPA is currently aware of two add-on programs for donor reports:
Donor Statements from Big Red Consulting: http://bigredconsulting.com/products/donor-statements-for-quickbooks/Donor Letters and Sales Receipts from Beyond the Ledger: http://www.beyondtheledgers.com/index.htm We tested both of these add-on features (they each have a free trial version). Microsoft Excel is needed to run both of them. From our tests, the Donor Statements from Big Red had better usability, seemed to provide better support, and allowed for better customization as well.

If a c…

Church Contribution to Foreign Church Not Recognized as a 501(c)(3)

Question:

A church would like to send funds to a foreign church. This foreign church is not an Internal Revenue Code section 501(c)(3) organization; it is simply a small ministry in need of help. Is there a problem if the church donates to this foreign church?

Answer:

According to IRS Publication 526, deductible contributions may only be made to “qualified organizations.” The only foreign charities that are cited in the publication as permissible are charities in Canada, Mexico, and Israel. Often, U.S. missionaries in foreign countries will use some of their support to aid local ministries that they are associated with. These type of transfers from a US church through a U.S. missionary are not a problem.

Of course, since local churches in the United States are exempt from income taxes, they are not concerned about getting charitable deductions for their contributions directly to foreign religious organizations. However, a church is serving as an agent for its contributors. Care should be …

Taxation of Roth IRA

Question:

Does a Roth IRA need to be taxed as income?

Answer:

A Roth IRA is an individual retirement plan which is subject to the same rules as a Traditional IRA with a few exceptions. Unlike a Traditional IRA, contributions to a Roth IRA are not deductible, but distributions from a Roth IRA may be tax free.

IRS Publication 590 explains when distributions from a Roth IRA are tax free:

"You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). You also do not include distributions from your Roth IRA that you roll over tax free into another Roth IRA."

If an employer were to make a contribution directly to an employee's Roth IRA account, the amount of the contribution must be treated as taxable compensation just as if cash compensation had been provided to the employee and the employee had subsequently contributed it to a Roth IRA.

Short-term Mission Support: Church Policy

Question:

A local church congregation intends to raise designated gifts in support of a member embarking on a short-term mission trip of less than one year. The funds will cover the member’s expenses, including personal living expenses. How should these funds be administered? What are the Internal Revenue Service reporting requirements?

Answer:

Since the member will be supported above and beyond his or her direct travel, lodging, and meal costs, he or she is not classified as a volunteer. True volunteers receive no support for their personal living expenses. However, they may be reimbursed for actual travel costs without being required to recognize the reimbursements as taxable income. Reimbursements in excess of actual costs are taxable to a volunteer (IRS Publication 526).

We believe that there are two alternatives for the church to administer the support.

Local Church Gives Member 100% of Funds Collected With No Accountability

The full amount of the support is classified as non-employee …

Housing Allowance for Ministers Employed in Parachurch Organizations

Question:

Can an ordained minister who once worked for a church and now works for a non-profit receive a housing allowance from the non-profit?

Answer:

"To qualify for the special tax provisions available to ministers, an individual must be a 1) “minister” and 2) must perform services “in the exercise of his ministry” (our emphasis). This quote begins an important section in the Minister's Audit Technique Guideon the Internal Revenue Service website.

Our experience has been that each parachurch organization and its employees offer unique twists on the interpretation of the above two-part test. Individuals and organizations faced with these important classifications are best advised to seek professional assistance. Ministries interested in a personal consultation with us should post a blog inquiry to which we can respond.

Several good blog postings on the definition of a minister are provided below. Readers should follow the links provided to read the blog postings or read the Mini…

Online Payroll Services for Churches

Question:

Can you recommend an online payroll processing service for churches?

Answer:

We are not aware of any services that specifically target churches at this time. Existing services such as Paychecks, ADP, and Intuit's Paycycle are not always familiar with the unique characteristics of ministerial vs. non-ministerial compensation. MinistryCPA does not offer an online payroll processing service. However, we have been able to assist multiple churches to process their own payrolls. This last year, MinistryCPA aided 26 churches in preparing quarterly and annual payroll reports in cooperation with the work of their own personnel.

Ministries interested in a personal consultation should post a blog inquiry with suggested time(s) that will be best to call at a phone number they should provide. Also, they typically provide a website address for the organization, if available. The ministry's website may help us to understand the nature of the organization and whether we might be qualifi…

Earned Income Credit and Housing Allowance

Question:

For purposes of the Earned Income Credit (EIC), is housing allowance considered to be part of earned income?

Answer:

According to the IRS, "The rental value of a home or a housing allowance provided to a minister as part of the minister's pay generally is not subject to income tax but is included in net earnings from self-employment. For that reason, it is included in earned income for EITC, unless you have an approved Form 4361."

This statement is part of IRS Publication 596 which goes on to say,
"Form 4361.
Even if you have an approved Form 4361, amounts you received for performing ministerial duties as an employee count as earned income. This includes wages, salaries, tips, and other taxable employee compensation. A nontaxable housing allowance or the nontaxable rental value of a home is not earned income [our emphasis]. Also, amounts you received for performing ministerial duties, but not as an employee, do not count as earned income. Examples include fees …

Reimbursed Moving Expenses and Form W-2

Question:

Are moving expenses that are paid to a new employee of a church reportable on Form W-2?

Answer:

The answer to this question hinges on whether the moving expenses were qualified or non-qualified. If the moving expenses were qualified moving expenses, the amounts reimbursed to the employee are reported only in box 12 of Form W-2 with code P. If the moving expenses are non-qualified, then amounts are reported in boxes 1,3, and 5 of Form W-2 as taxable income. These amounts are also subject to income tax withholding. (Form W-2 Instructions) Of course as explained within other posts in this blog, boxes 3 and 5 are blank when an employee is a minister.

This answer if only helpful if the distinction between qualified and non-qualified moving expenses is made. Qualified moving expenses are expenses incurred under an accountable plan.

"To be an accountable plan, your employer's [moving expense] reimbursement arrangement must require you to meet all three of the following rules.�…

Form W-2 When 100% of Pastor's Pay is Designated as Housing Allowance

Question:

A minister currently receives only a housing allowance from his church. Are these amounts reportable on Form 1099-MISC or Form W-2?

Answer:

The answer to this blog post can be found in a February 3, 2009 blog post:

Form W-2 When 100% of Pastor's Pay is Designated as Housing

While it is true that this blog post is several years old, the information contained within the post is still accurate and relevant today.

Depreciating a New Church Building and Reporting Rental Income

Question 1:

A church recently purchased a church building. Is the church required to begin depreciating the building?

Answer 1:

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 (especially small churches without accounting personnel) are best served by using 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 Presentation: Church and Christian Ministry Financ…