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Showing posts from June, 2013

Facility Construction and Land Acquisition- GAAP vs Cash Basis

Question:

A church purchased land and constructed a new building on it. How should the church record the land acquisition and subsequent construction of its facility?  Are they considered fixed assets and, in relation to the facility, depreciated?

Answer:

The accounting treatment of this situation depends on the church's choice of accounting method. If a church chooses to follow GAAP (Generally Accepted Accounting Principles), it is required to capitalize all material fixed asset acquisitions, ranging from land and facilities to other long-lived assets exceeding some designated minimum threshold. For example, a church may choose to capitalize and depreciate all assets with a cost greater than $2,500.

If, however, the church uses the cash or modified cash basis of accounting, as most small- to medium-sized churches do, it will not record fixed assets on its books. Therefore, the cost of the land and building will simply be expensed at the time of purchase. Under this method, land and f…

Partial-Year Housing Allowance

Question:

A pastor begins serving at a new church on July 1 of a given year. The church intends to designate a portion of his compensation as housing allowance. How should the pastor and the church establish a partial-year housing allowance?

Answer:

The pastor can receive a housing allowance for a partial tax year. In order to do so, he should request a designation from the church of an agreed-upon portion of his compensation as housing allowance. This portion or percentage can then be applied against his salary to determine the designated amount of housing allowance. Additionally, he will be required to comply with the final two rules for excludable housing allowance:
Actual housing expenses, July 1-December 31Fair rental value plus cost of utilities for the same periodThe actual amount of excludable housing allowance is equal to the lesser of these three amounts. The pastor and church should keep in mind that up to 100% of his salary can be excludable as housing allowance within the gui…

Fixed Asset Records When Using Cash-Basis Accounting

Question:

A church uses the modified cash basis for its accounting. Under this method, when it purchases fixed assets, the purchase amount is recorded as an expense (or "disbursement"). However, because the church does not then have a record of fixed assets, it has trouble keeping track of them. What solution would you recommend for this problem?

Answer:

Because most small to medium-sized churches opt for the modified cash basis of accounting, this can be a common problem. Inaccurate records of fixed assets can lead to unrealized theft, loss due to damage, or absence of a valuation of church assets. For example, the loss of church electronic equipment in a fire may not be covered by insurance if the church cannot provide an accurate record of the value of the assets. 

However, this problem is easily remedied. The church treasurer or another independent individual should simply prepare a spreadsheet or other document with details of fixed asset purchases, including original cost,…

Rent-Free Use of Parsonage in Lieu of Salary

Question:

A church allows its assistant pastor to live in the parsonage in lieu of giving him a cash salary. Because his salary would be less than the rental value of the property, he pays the difference to the church as rent each month. What is the proper tax treatment to the pastor of the parsonage in lieu of cash compensation? Will the church have to begin paying property taxes?

Answer:

The value of the partially rent-free housing in lieu of salary is subject to SE tax, but not income tax for the minister. Additionally, because he is a church employee, the property will not be placed back on the real estate tax roll, so the church will continue to enjoy its property tax exemption.

For further information about property tax exemptions for church property, type "property tax" into this blog's search window.

Parsonage Rental to Church Employee at Below Fair Rental Value

Question:

A church has an unoccupied parsonage which it would like to rent at below market value to a non-ministerial employee of the church. How should the church treat this arrangement for tax purposes?

Answer:

As long as this arrangement is not a condition of employment, the difference between market value and the amount of the rental payments must be reported as compensation on Form W-2, subject to income and FICA taxes. This does not qualify as a housing allowance because the employee is not a minister. 

If the employee were required by the church to live on the premises, the church could rent the parsonage to him at below market value (or provide it free of cost) with no tax consequences. For example, if the church custodian is required to live on the premises and be on call around the clock, housing provided by the church would not be considered additional income.

According to IRS Publication 525, lodging is nontaxable to an employee if it is "a. Furnished on the business premi…

HRAs and Health Insurance Premiums Credit

Question:
What should a church do to establish a Health Reimbursement Arrangement to pay for the pastor's personal health insurance premiums?
Answer:

In the current health insurance climate of high premiums and reduced benefits, many churches have decided to radically change their benefit packages. One of those solutions has been to establish a Health Reimbursement Arrangement (HRA) for their pastor. The following link to our MinistryCPA.org website seeks to provide helpful information.
Health Reimbursement Arrangement Help
Further, many of these same churches have also qualified for the Credit for Small Employer Health Insurance Premiums. More information on this credit is also available within the following May 2011 blog post.
Small Business Health Care Tax Credit

Direct Payment of Pastor's Housing Expenses

Question:

A church pays the rent to its pastor's landlord each month. Do the rental payments qualify for housing allowance? Are the utilities also considered housing allowance if paid directlyby the church?

Answer:

Generally, it is irrelevant whether a church pays its minister’s housing expenses directly or designates a portion of his compensation as housing allowance for his personal payment of these expenses. We say “generally” because at least one state (Pennsylvania) permits only direct payment of housing expenses in order to enjoy tax free status.