November 22, 2013

Memorial Fund Gift for Employee

Question:

A church staff member recently passed away. His wife remains a current employee. If a memorial fund is established for the family of the deceased employee, can the church (her employer) make a non-taxable contribution to the memorial fund, even though it benefits a current employee and her family?

Answer:

Multiple factors must be taken into consideration to determine the taxability of a disbursement of this nature. 

First, the "gift" cannot be disguised compensation, (e.g. previously undisbursed vacation pay for the deceased employee). Even if it is designated by the church as a gift, the disbursement may be taxable as compensation if the IRS deems it to be pay that he was owed for previous services. Additionally, the contribution cannot be made in anticipation of future services by the wife; if this is judged to be simply advanced compensation, it will be taxable.

Also, the church should consider whether contributions of this nature have been a common practice in the past for non-employees. Have gifts been made to memorial funds for non-employee members of the church, or are employees the sole recipients of the contributions? If employees are the typical beneficiaries of gifts of this nature to the exclusion of other church members, this contribution will likely be viewed by the IRS as taxable compensation. 

While these considerations seem to suggest a restriction on gifts of this nature, there are instances when memorial fund contributions for employees will not be taxable. As noted above, there are multiple factors influencing taxability which must be applied to the facts and circumstances of each particular case. While we certainly do not want to discourage gifts of this nature, churches should be aware of these guidelines and make financial decisions accordingly. Memorial fund contributions made in good faith will generally be non-taxable.

It is interesting to note that in the case of the Hokie Fund, established at Virginia Tech University, memorial fund contributions to victims and their families were specifically excluded from tax, regardless of the employment status of the recipients (Public Law 110-141, §1).

November 21, 2013

Small-Employer Healthcare Arrangements

Question:

Our church is a small employer. We currently offer health benefits to two of our pastoral staff. How does the Affordable Care Act affect our church beginning January 1, 2014?

Answer:

The Affordable Care Act (ACA) market reforms will affect almost all employers who provide health benefits to their employees. Each small employer must wisely plan for the changes effective January 1, 2014.


MinistryCPA has researched the ACA on behalf of its small-employer clients in consideration of the organizational and business situations under which they operate. Because each small employer is unique, MinistryCPA works with small employers on a client-by-client basis.

November 17, 2013

Humanitarian Aid as a Business Expense

Question:

I am a missionary in a restricted country, and a large part of my ministry is providing humanitarian and medical aid to individuals. I receive my financial support directly from my church, which issues me a Form 1099-MISC. Can I deduct my humanitarian aid expenses for income and self-employment tax purposes? I have considered using the Schedule C gift deduction, but the $25 per-client limit on deductions is highly restrictive. Also, the nature of the expenses does not seem to fit the IRS guidelines for business gifts.

Answer:

Since IRS Publications do not address every possible category of deductible expenses, general principles must be applied in this situation. IRS Publication 535 describes allowable business deductions: "To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary." 

Based on this definition, humanitarian aid expenses incurred in the course of ministry-based business are deductible, as long as no personal benefit is derived (i.e. none of the expense benefits the missionary or his/her family). These expenses do not fit the definition of business gifts, and should be classified as "other expenses" on Schedule C, or in the case of a Form W-2 employee, should be deducted on Form 2106 as an employee business expense.

November 01, 2013

Housing Allowance on Non-ministerial Income?

Question:

As the minister of a small church, I receive no compensation. I do, however, work a secular job for which I am compensated, and I use the earnings from this job to cover my housing expenses. Can I apply to the IRS for a housing allowance designation of this income?

Answer:

Unfortunately, no. According to IRS Publication 517, "The church or organization that employs you must officially designate the payment as a housing allowance." A housing allowance is designated by your employer, not the IRS, and is available only on income from ministerial services.

Stadium Parking Income for a Church...Continued

Question:

We recently answered a question related to a church opening its parking lots for patrons of a nearby football stadium in exchange for donations (read the previous post here: Stadium Parking Income for a Church). In relation to that situation, a reader asks why the church may be subject to UBIT (unrelated business income tax) if the work is performed by volunteers.

Answer:

The question references an exception to UBIT in IRS Publication 598, which states, "Any trade or business in which substantially all the work is performed for the organization without compensation is not an unrelated trade or business." Again, please reference our earlier post for more on the specifics of an unrelated trade or business. 

This exception would seem to include the situation under consideration, but the phrase "substantially all the work" is extremely important in determining whether income is exempt. This issue was addressed in IRS Letter Ruling 982206, issued January 29, 1998. M, a tax-exempt organization that received income in return for providing space for the storage of camping trailers, felt that it should not be subject to UBIT on this income because the vast majority of the work was performed by volunteers. Both M and the IRS agreed that the income itself would be subject to UBIT, but M contended that the volunteer exemption should apply. However, according to the ruling, "the exclusion from unrelated  business income for volunteer labor under section 513(a)(1) of the Code is only applicable when the activity performed by the volunteers is a material income producing factor in carrying on the activity." In this case, the IRS held that the payments ("donations" in our question) were "for the use of the facility over a period of time rather than the minimal services attendant with the movement of the units into and out of the building." In essence, the patrons were paying for the use of the space, not for the minimal services performed by the volunteers, including services to collect monies paid for the use of the facilities

The application to our question is clear: in the situation presented here, where the use of the space is the primary, regularly conducted service provided in exchange for payment, the work performed by volunteers is not substantial enough to provide for exemption from UBIT.