Taxability of Scholarship Awards

Question:

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?

Answer:

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"

Comments

Rental of a Church Parsonage to a Non-Minister

Question: A church owns a parsonage, but the pastor does not use it as he owns his own home. The church rents the parsonage to a tenant other than a minister or employee of the church. Will the church be responsible for paying income tax on these monies as Unrelated Business Income (filing a Form 990-T) even if the money is used to carry on the business of the church? Answer: Whether the money is used for church purposes is irrelevant. IRS Publication 598 states: "If an exempt organization regularly carries on a trade or business not substantially related to its exempt purpose, except that it provides funds to carry out that purpose, the organization is subject to tax on its income from that unrelated trade or business." Fortunately, in the case of rental income from real property, such income is "excluded in computing unrelated business taxable income" (Publication 598). Caution: see content below regarding debt-financed property. However, a second concern not a...

How can my ministry expenses be covered by the church?

How can my ministry expenses be covered? Many ministers use their personal autos for ministry purposes. Their employers can reimburse these costs using a standard mileage rate published by the IRS. The per mile rate represents employees’ entire reimbursable cost other than highway tolls and parking tabs. If not covered by use of the ministries’ credit card, other costs can be reimbursed as well—business and travel meals, lodging, office supplies, and professional library purchases among them. Some ministries reimburse travel costs using per-diems published by the IRS. If employee business expenses are not reimbursed, the personal tax deduction benefit to the individual minister is severely limited. Non-taxable reimbursements after documentation is provided to the employer follows IRS rules for accountable plans. Non-taxable cash advances before expenses are in...

What health insurance coverage can I get as a minister?

What are my options for health coverage as a minister? Many churches and Christian organizations have discontinued providing employer-paid group health plans. In lieu of paying out extremely expensive, one-size-fits-all insurance premiums, some have opted to provide taxable stipends and let employees shop for their own coverage. The good news: you can choose your own. The bad news: the stipend may not be enough and securing coverage can be complicated. Health care sharing plan options can be more economical. But they don’t qualify as standard health insurance: health care providers can balk, and the monthly subscriptions are not tax deductible. The Marketplace ( www.healthcare.gov ) offers alternatives, including advance premium tax credits to help with the monthly costs. Watch out for unpleasant surprises, however, since the tax credits must be reassessed when you file your annual Form...

MinistryCPA - Corey A. Pfaffe, CPA, LLC

Search This Blog