December 13, 2013

Designating a Donation on the Face of a Check

Question:

I have read that donors should not write the name of a missionary directly on their checks to churches or mission agencies.  Rather, they should include it on a separate piece of paper.  I have always believed this to be an urban legend.  Isn't the real issue whether the church or agency has direct control over the gift, and therefore gifts would still be deductible even if the missionary's name was written on the check?

Answer:

You are absolutely correct; this is a myth. While it may give an appearance of impropriety, the question at issue here is not the designation, but rather control over the gift. A designation becomes an issue if it is made in such a way that it serves personal purposes. A donor who writes the missionary's name on the check does not endanger the deductibility of the gift, as long as 1) the missionary has already been identified by the church as a worthy recipient or 2) the church subsequently confirms, of its own volition, that worthiness. In other words, it is (or becomes) the church's decision to support the missionary. As noted earlier, the key in this situation is control. If the church/organization has identified the missionary as a target of support, then the organization is exercising control over those gifts, and they are deductible. 

However, if after making the gift, a donor is still able to direct the use of the funds, the gift is most likely not deductible. A church or mission agency must avoid becoming a conduit, particularly for someone who may otherwise be expected to assist the recipient regardless of a charitable motivation. For example, a father who donates to a church school seeking for the donation to cover his child's education should not receive credit for a charitable contribution. 

For more details on this issue, follow the links below:

December 04, 2013

Employer Paying Housing Expenses Directly

Question:

A mission agency runs a school in a foreign country and pays its directors (who are ordained or licensed ministers) a housing allowance as part of their salaries. The ministers avoid income tax on the allowance, but do incur self-employment (SE) taxes. Can the agency pay for the housing directly and correspondingly reduce the salaries of the directors in order to decrease their SE tax burden? 

Answer:


The agency can certainly pay for the housing directly; however, under normal circumstances, this will not decrease the SE tax burden on the directors. Because the directors still receive the housing benefit, even though it is paid directly to the landlord, it will be taxable as a housing allowance. In essence, the total tax will be unchanged since the IRS sees no change in the true nature of the compensation.

Possible exception to the above information:


If paid directly by the agency, the benefit may be non-taxable under very strict guidelines provided by the IRS in Publication 525. According to the Publication, "You do not include in your income the value of...lodging provided to you and your family by your employer at no charge if the following conditions are met: The lodging is


·    Furnished on the business premises of your employer, 
·    Furnished for the convenience of your employer, and 
·    A condition of your employment. (You must accept it in order to be able to properly perform your duties.)"

If these conditions are satisfactorily met, the housing benefit can be excluded from income, and the directors will realize a tax benefit. Publication 15-B provides more information regarding non-taxable housing benefits for an employee.

Federal Court Rules Against Minister's Housing Allowance (Under Appeal)

An important news update that may affect ministries and tax-exempt organizations across the country:

On Friday, November 22, 2013 Federal Judge Barbara Crabb of the Western District of Wisconsin ruled in favor of the Freedom from Religion Foundation (FFRF), declaring the minister's housing allowance unconstitutional. It is important to note, first of all, that this will have no immediate effects. Additionally, only this specific district is affected by the ruling unless it is upheld by a higher court. Presumably, this case will be appealed to the Seventh Circuit Court of Appeals in Chicago, which will rule for Wisconsin, Indiana, and Illinois. Until the Seventh Circuit rules on the appeal, the unconstitutionality ruling will not be enforced.

The specifics of the ruling:

Judge Crabb held that the housing allowance provides benefit to religious organizations and ministers that has no corresponding secular benefit. The provision of a church-owned parsonage as a tax-free benefit to a minister was not ruled unconstitutional. Based on this ruling, only minister-owned housing for which a housing allowance is provided will be affected. As noted earlier, no ministers or organizations will be immediately affected. However, those who may be affected should continue to watch for updates on the final ruling.

For more, follow the links below.

NCLL on Housing Allowance Ruling

ECFA on HA Ruling

FFRF v Geithner: Parsonage Exemption

CapinCrouse Update