March 28, 2013

Minister Contributing to His Own Ministry

Question:

Can a minister donate to his own ministry? If so, do amounts have to be from income he earned from non-ministry sources?

Answer:

The Minister Audit Technique Guide provides directions to its agents as they examine minister's tax returns. The Guide offers some helpful insight to ministers as well:

"Dues versus Contributions
...Ministers' contributions to the church are not deductible as business expenses. They may argue that they are expected to donate generously to the church as part of their employment. This is not sufficient to convert charitable contributions to business expenses. The distinction is that charitable contributions are given to a qualifying organization (such as a church) for the furtherance of its charitable activities. Dues, on the other hand, are usually paid with the expectation that a financial benefit will result to the individual, as in a realtor's multi-list dues or an electrician's union dues. A minister's salary and benefits are not likely to directly depend on the donations made to the church. They may still be deducted as contributions on Schedule A [our emphasis] but may not be used as a business expense to reduce self-employment tax."

So, while a minister's donation to his employing ministry is not deductible as a business expense, it is deductible on Schedule A as a charitable contribution. This is true regardless of the source of the monies donated.

Housing Allowance Expenses: Cash or Accrual?

Question:

A minister was billed for his utilities the year after the expense was incurred. Should he deduct the expense in the year he incurred the expense or in the year he paid for the expense?

Answer:

By default, virtually all individual taxpayers are expected to report their income and deductions on a cash basis. This means that income received during the calendar year is taxable in that tax year. Also, expenses incurred are deductible in the year paid. This is also true of minister's housing expenses as illustrated in the above question.

March 26, 2013

Bartering Income/Expense: Church Reporting Requirements

Question:

A church is paying its organist by making a donation to his daughter's trust fund. This is being done because the daughter is disabled and receives public assistance. If the organist makes over a certain amount this assistance will cease. Does this comply with IRS rules?

Answer:

Our interpretation of the question: Is it appropriate to redirect an employee’s compensation to someone other than the one providing the services, then excluding these amounts from reportable income?

The situation described above appears to be a classic example of bartering. Regardless of the form of the compensation (even if attempts are made to characterize the income as benevolent gifts), the one earning the compensation is subject to taxation. If the amount of compensation exceeds IRS filing requirements, either Form W-2 or Form 1099-MISC should be filed depending on the employee or independent contractor status.

Review of Housing Allowance Documentation

Question:

A missionary receives a Form 1099-MISC from the service organization which receives funds for him. Recently he became aware of the benefit of clergy housing allowance (HA) after reading our 2009 blog post Housing Allowance and Form 1099-MISC, but still has a few questions:
  1. What documents are need to justify this?
  2. Would the IRS find it unusual that he did not claim a HA in previous years? Could this be explained in a letter?
Answer:

Documents are needed to help support consideration of the three-part test applied to minister's housing allowances.
  • Designation of a portion of the minister's income to housing allowance. Written certification of this designation by the service organization should be requested. Having accomplished this, the amount of housing allowance designation must be subtracted from compensation reported on Form 1099-MISC as described in the above referenced blog post.
  • Support for amounts actually spent for housing expenses. A worksheet listing the categories permissible by the Internal Revenue Code may be found on our website.
  • Evidence of the fair rental value of the minister's primary residence. Such evidence may include advertisements for rental of comparable properties, the written opinion of qualified real estate or rental agents, and formulas for estimating fair rental value as a percentage of the fair market value of the property.
In regard to not claiming the clergy HA in previous years, it is unlikely that the IRS will concern itself with a taxpayer's failure to claim a benefit.

Missionaries must consider multiple issues regarding their foreign and US housing arrangements. But the above general guidelines are still applicable relative to their primary US residence.

March 21, 2013

MinistryCPA Special Topic: Donating a Vehicle

Non-cash donations may be just as useful to ministries as cash contributions. Some contributions must be treated with special care however. Take donating a vehicle for example....

The IRS does have some special rules for donating cars. Instructions for Form 8283 Noncash Charitable Contributions say the following about donating cars:

"If you donate a qualified vehicle with a claimed value of more than $500, you cannot claim a deduction unless you attach to your return a copy of the contemporaneous written acknowledgment you received from the donee organization. The donee organization may use Copy B of Form 1098-C as the acknowledgment. An acknowledgment is considered contemporaneous if the donee organization furnishes it to you no later than 30 days after the:
  • Date of the sale, if the vehicle was sold [by the donee organization] in an arm's length transaction to an unrelated party, or
  • Date of the contribution, if the vehicle will not be sold by the donee organization before completion of a material improvement or significant intervening use, or the vehicle will be given or sold to a needy individual for a price significantly below FMV in direct furtherance of the organization's charitable purpose of relieving the poor and distressed or underprivileged who are in need of a means of transportation."
To read the entire section on vehicle donation, click on the Form 8283 link provided above and read the section "Qualified Vehicle Donations."

Review: Allowable Deductions for a Minister

Question:

A new minister is wondering what deductions are available to him as a minister. He receives a Form 1099-MISC from his church.

Answer:

It is important for a pastor to be recognized as an employee of the church in order to take advantage of many ministers' tax advantages. This means that he will receive a Form W-2, instead of the Form 1099-MISC which is intended for non-employee, independent contractors. These employment advantages include:
  1. Housing Allowance (HA) – non-taxable to the extent that the HA was used for housing expenses; any HA designation greater than actual expenses will be taxable income (For the three-part test, please follow this link and select 2012 Minister's Housing Allowance Worksheet http://ministrycpa.com/?q=alldownloads).
  2. Form 4361 exemption (optional) – will not pay Self Employment (SE) taxes on your ministerial income. A minister must make this election within the first two years of becoming a minister however and will have to plan for his own retirement as his ministerial earnings will not be used in the calculation of any Social Security benefit to which he may be entitled.
  3. Form 2106 expenses – deduction for any unreimbursed ministry expenses. These expenses typically include vehicle mileage, travel and entertaiment, professional dues and supplies, business use of home when no church office is provided, etc. If the church employs an accountable plan, reimbursed expenses are not reported as deductions nor are reimbursements taxable. However, if the minister incurs expenses which are not reimbursed by the church, he can claim a deduction on this Form for them. These unreimbursed expenses will also reduce any SE tax he may owe.
  4. Internal Revenue Code Section 403(b) Retirement Contributions - Deduction for any elective deferrals including both a reduction in income taxes and SE taxes.
  5. Other non-taxable fringe benefits intended for employees, including (a) group, term life insurance, (b) employee health insurance, (c) Health Reimbursement Arrangements (HRA), (d) health savings accounts (HSA), (e) employer funded child-care, etc.
See the Minister’s Audit Techniques Guide and Form 2106 Instructions for information on deductible expenses.

March 14, 2013

Today the MinistryCPA Blog has reached the 100,000 page views milestone!
 
 
Thank you to everyone who has used this blog and has helped us reach this milestone. We hope that MinistryCPA has been of service to you and that our posts will continue to help guide you in ministerial and ministry tax issues. We look forward to serving you in the future and reaching our next milestone!
 
Corey Pfaffe - CPA, Principal
Tara Waterson - CPA, Senior Accountant
Laurie Pfaffe - Office Administrator
Dan Choden - Accounting Associate
Aaron Oberholtzer - Accounting Associate
 
 
 

Mission Support for Building Project: Taxable to Missionary?

Question:

A church collected donations for a missionary it supports for the purpose of constructing a special building project. How should these amounts be reported? They would not be considered income to the missionary, correct?

Answer:

First, the church may wish to contribute the funds to the missionary's mission agency. Mission agencies have personnel with the knowledge to properly classify disbursements such as the one cited here as to whether they are taxable. This experience is rarely available to a local congregation.

For example, were the missionary to purchase the land for a building project and title it in his own name, no business expense would be created since the missionary never relinquished ownership of the property. A mission agency would not classify this disbursement as a non-taxable reimbursement.

If no mission agency is involved, the church is probably best advised to issue Form 1099-MISC for the full amount of support. If the missionary is able to document the construction costs as a business expense, he can do so on his personal income tax return.

Travel and Meals for Volunteers

Question:

Are volunteer miles deductible? If so what are the limitations on taking a deduction for these miles? If an individual stops for lunch on the way to volunteer can he no longer count the miles? If he has a meal provided for him for volunteering does the meal cancel out any deductible miles?

Answer:

The Instructions for Schedule A deal with charitable deductions. Specifically for charitable miles it says, "If you drove to and from the volunteer work, you can take the actual cost of gas and oil or 14 cents a mile. Add parking and tolls to the amount you claim under either method. But do not deduct any amounts that were repaid to you."

Meals provided to volunteers in the conduct of their service are not taxable to the volunteer.  According to IRS Publication 526,  

"You cannot deduct personal, living, or family expenses, such as the following items.

-- The cost of meals you eat while you perform services for a qualified organization, unless it is necessary for you to be away from home overnight while performing the services."
In these cases, a volunteer may deduct "reasonable amounts for lodging and meals while away from home overnight."

While in transit to a charitable event or service, any diversion for personal purposes cannot add to the deductible mileage (e.g., personal meals).

Additional help with determining amounts which may be deductible as charitable giving can be found in Publication 526.

March 12, 2013

Form 1099-MISC Refresher

Question:

Does it matter how many times an individual has provided services for for a church when determining whether to provide him with a Form 1099-MISC? Also, should office holders within the church who receive an honorarium receive a Form 1099-MISC?

Answer:

First, it does not matter how many times an individual has performed services when determining his status as employee (compensation reported on Form W-2) or independent contractor (compensation reported on Form 1099-MISC). The following blog post addressed the key criteria for determining this status:

Employee or Independent Contractor

Church Employee or Independent Contractor

Form 1099-MISC must be filed for any individual to whom $600 or more was paid. The Form 1099-MISC Instructions say regarding box 7:

"Include fees, commissions, prizes and awards for services performed as a nonemployee, other forms of compensation for services performed for your trade or business by an individual who is not your employee."

Second, amounts paid to a non-employee church office holder are also subject to these requirements.

Memorial Fund for Employee of the Church: Taxable?

Question:

A member of a church just passed away leaving a wife and six children. The church wants to have a memorial fund that helps the wife. Donations to the fund are not deductible, correct? Would the gifts be included as taxable income to the wife? If the wife was an employee of the church, would the gifts be taxable income to her?

Answer:

Donations to a church are deductible as a charitable contribution. This is true whether the donations are given to the general fund, or marked for a specific fund account such as a memorial fund.

Gifts from a benevolence (memorial) fund are discussed in the following three blog posts:

Benevolent Fund Disbursements to Employees

Benevolent Gifts to Employees (Emergency or Not?)

Benevolence Fund Receipts and Disbursements

These three blog posts all state that gifts given to employees are generally taxable income reportable on Form W-2. The exception to this statement is the employee/church member gift that is truly benevolent, not disguised compensation.