September 30, 2013

Small Business Health Care Tax Credit Changes


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


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


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?


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

Cash Bonus to Pastor


A church has recently received a large cash donation, and the congregation would like to give a large gift to its pastor in appreciation of his fifty years of service. Can the church give the gift in such a way as to avoid taxation to the pastor? Will this gift jeopardize the 501(c)(3) tax-exempt status of the church?


First of all, this gift will not affect the tax-exempt status of the church, assuming the gift is based on previous years of low compensation. The church should exercise care on this point, as large gifts can be construed by the IRS as private inurement, the enrichment of an individual to the detriment of the tax-exempt organization's primary purpose. (For more on this, see a recent blog post: Private Inurement)

After considering the issue of private inurement, the church and pastor have multiple options concerning the gift and resulting taxability of the bonus. Depending on the minister's individual tax situation, he may want to consider one or more of the following strategies to minimize the tax consequences:
  • Defer all or a portion of the bonus into a 403(b) tax-sheltered retirement plan (this strategy delays or eliminates both income and self-employment tax)
  • Designate some or all as housing allowance (the designation will remain subject to self-employment tax, but not income tax)
  • Use the bonus to pay other tax-deductible expenses, (e.g. charitable contributions, professional expenses)

September 21, 2013

Safe Harbor for Home Office Deductions


As a minister, I have an office in my home because I do not have an office at the church. I heard there is a simplified method for deducting home office expenses on my 2013 tax return. Is this true? If it is true, is there an advantage to using the new method?


The IRS has provided a safe harbor method for deducting home office expenses. The safe harbor method may be used for tax years beginning on or after January 1, 2013. Similar to the actual-expense method, the safe harbor method only permits a home office deduction if the office is used “regularly and exclusively” for business purposes.  The office must also be for the convenience of the employer.

Just because the safe harbor method is available does not mean it is the best option for you. The safe harbor method has advantages and disadvantages.

  • Utilities, insurance, repairs and maintenance, and other expenses do not need to be tracked.
  • Allowable mortgage interest and real estate taxes may still be claimed as an itemized deduction on Schedule A.
  • Recapture of depreciation is not required when your home is sold. (This is also a disadvantage. See below.)
  • Each year you are allowed to choose the method that is most advantageous.
  •  Depreciation is not permitted in years the safe harbor method is used.
  • The deduction is $5 per square foot and is limited to $1,500 (a maximum of 300 square feet).
  • Excess home office deductions may not be carried forward.
  • Loss carry forwards may not be claimed when the safe harbor method is used.
Regardless of the method chosen, you must still calculate the portion of your home used for business purposes.

Please keep in mind that if you receive a housing allowance, you should already be keeping detailed records of home expenses, which can be used when calculating the actual-expense method.

Read Revenue Procedure 2013-13 for more detailed information.

September 18, 2013

Sales Tax Exemption for Pastor's Car?


A church recently bought a car in the pastor's name. How can he get the sales tax exempted when he goes to register his car?


He cannot.

Only vehicles titled in the name of a tax-exempt organization qualify for sales tax exemption. Of course, if the minister makes personal use of a church-titled vehicle, he is subject to taxation issues which are addressed in other postings on this blog.

September 10, 2013

Taxability of Scholarship Awards


A church funds a yearly scholarship for a needy student. Will payment of the funds directly to the college help avoid taxation to the student?


Any scholarship funds, whether paid to the student or directly to the college, generally are not taxable, as long as they do not represent disguised compensation. For example, a scholarship awarded to an "unpaid intern" in lieu of cash compensation will not be tax-free.

IRS Publication 525: "A candidate for a degree can exclude amounts received as a qualified scholarship or fellowship. A qualified scholarship or fellowship is any amount you receive that is for tuition and fees required to enroll at or attend an eligible educational institution, or
course-related expenses, such as fees, books, and equipment that are required for courses at the eligible educational institution. These items must be required of all students in your course of instruction. Amounts used for room and board do not qualify for the exclusion."

Scholarship funds will, however, reduce the amount of qualified education expenses that can be used to calculate education-related tax benefits. Essentially, the more scholarship funds that the student takes advantage of, the less his or her benefit for education-related expenses will be. 

Additionally, if total scholarships exceed qualified education expenses, the excess can be taxable as income. IRS Publication 570 provides additional guidelines regarding taxation of scholarship funds: "A scholarship or fellowship is tax free only to the extent:
  • It does not exceed your expenses
  • It is not designated or earmarked for other purposes (such as room and board)
  • It does not represent payment for teaching, research, or other services required as a condition for receiving the scholarship"

MinistryCPA Special Topic: How Will My Social Security Benefits be Taxed?


I am 64 years old and planning to retire at 65, which is my full retirement age (FRA). Once I begin collecting Social Security benefits, will those benefits be taxable? If so, to what extent?


Social Security benefits may be subject to tax, depending on your combined income for a given year.  Combined income equals the sum of adjusted gross income, tax-exempt interest, and one-half of SS benefits. The percentage of tax is based on this total combined income.

Up to 50% of SS benefits may be taxable if combined income exceeds:
  • $25,000 if filing as an individual
  • $32,000 if married, filing jointly
Up to 85% of benefits may be taxable if combined income exceeds:
  • $34,000 if filing as an individual
  • $44,000 if married, filing jointly
Note: Most married taxpayers who file separately will pay taxes on their SS benefits regardless of combined income level, unless they lived separately the entire year..