December 31, 2014

MinistryCPA's Ten Most Viewed Blog Posts

As we head into the new year, let's take a look into the past! Almost seven years ago to the day, Dr. Corey Pfaffe put up his first blog post. In honor of the blog's seven year anniversary, here are the ten blog posts that have been visited the most since the blog's inception. 
  1. Housing Allowance and Form 1099-MISC Reporting (most page views all-time)

  2. Missions Trip Giving

  3. Churches Recording Depreciation

  4. Rental of a Church Parsonage to a Non-minister

  5. Travel for Mission Trip Deductible as Charitable Donation

  6. Church Withholding of FICA Taxes

  7. Self-Employed Health Insurance Deduction

  8. Benevolent Gift Rules Review

  9. Ministers' Retirement Options

  10. Benevolent Fund Giving and Disbursement

December 23, 2014

2015 Bible Reading Schedule

Consider reading the entire Bible in 2015. You may have seen many alternative schedules. Here is a link to one on our website that Corey developed more than 30 years ago and has enjoyed using in most of those years. It concentrates your reading and thinking on one passage per day, alternates Old Testament and New Testament books, and avoids breaking up your New Testament reading into partial chapters.

December 11, 2014

New Standard Mileage Rates Now Available; Business Rate to Rise in 2015

Yesterday, the Internal Revenue Service issued the 2015 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. 

Beginning on Jan. 1, 2015, the standard mileage rates for the use of a car, van, pickup or panel truck will be:
  • 57.5 cents per mile for business miles driven, up from 56 cents in 2014
  • 23 cents per mile driven for medical or moving purposes, down half a cent from 2014 
  • 14 cents per mile driven in service of charitable organizations
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas and oil. The rate for medical and moving purposes is based on the variable costs, such as gas and oil. The charitable rate is set by law.

Taxpayers always have the option of claiming deductions based on the actual costs of using a vehicle rather than the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after claiming accelerated depreciation, including the Section 179 expense deduction, on that vehicle. Likewise, the standard rate is not available to fleet owners (more than four vehicles used simultaneously). Details on these and other special rules are in RevenueProcedure 2010-51, the instructions to Form1040 and various online IRS publications including Publication17, Your Federal Income Tax.

Besides the standard mileage rates, Notice2014-79, posted yesterday on IRS.gov, also includes the basis reduction amounts for those choosing the business standard mileage rate, as well as the maximum standard automobile cost that may be used in computing an allowance under a fixed and variable rate plan.

December 10, 2014

5 Reminders about Charitable Contributions

It's that time of year when individuals and businesses are making year-end gifts to charity. In a recent email, the Internal Revenue Service reminded those individuals and businesses that several important tax law provisions have taken effect in recent years. Here are five topics that taxpayers should keep in mind: 
  1. Qualified Charities

    Before you give that year-end donation, make sure the charity is eligible. Only donations to eligible organizations are tax-deductible. Select Check, a searchable online tool available on IRS.gov, lists most organizations that are eligible to receive deductible contributions. In addition, churches and government agencies are eligible to receive deductible donations. That is true even if they are not listed in the tool's database.

  2. Year-end Gifts

    Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2014 count for 2014, even if the credit card bill isn't paid until 2015. Also, checks count for 2014 as long as they are mailed in 2014.

  3. Itemize Deductions vs. Standard Deductions

    For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction. This includes anyone who files a short form (Form 1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. Use the 2014 Form 1040 Schedule A to determine whether itemizing is better than claiming the standard deduction.

  4. Guidelines for Giving Clothing and Household Items

    Household items may include furniture, furnishings, appliances, electronics, and linens. Generally, clothing and household items must be in good condition or better in order be claimed as tax deductible.

    Donors must get a written acknowledgement from the charity for all gifts worth $250 or more. The written acknowledgement must include, among other things, a description of the items contributed.

    For all donations of property, including clothing and household items, get from the charity, if possible,
    a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity's unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value.

    If the amount of a taxpayer's deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.
     
  5. Guidelines for Monetary Donations

    Regardless of the amount, a taxpayer must have (1) a bank record or a (2) written statement from the charity in order to deduct any donation of money. The record must show the name of the charity and the date and amount of the contribution. 

    For donations of $250 or more, a written acknowledgement from a charity for each deductible donation (either money or property) is required. 

December 08, 2014

Ice Bucket Challenge - Taxable Income?

Question:

A church's minister has an immediate relative who has been suffering from ALS for the past six years. The church sponsored and organized an "Ice Bucket Challenge" for the relative.

Originally, the thought was to raise $3,000-$5,000. The church intends to (1) transfer the funds to the facility that cares for the relative or other ALS charities and (2) report the funds as a bonus compensation to the minister.

However, the church raised close to $30,000; now the tax situation has more serious consequences if the church calls it compensation to the minister. How should the church report these monies?

Answer:

We see three areas that could affect how to report this money:

  1. If the funds are simply going to an organization to support its general operations (not to pay a single patient's costs) or to other ALS charities, the transfer is from one Internal Revenue Code section 501(c)(3) organization to another. There is no tax consequence for the church's ice bucket challenge.

  2. If the funds are given as true benevolence (as opposed to disguised compensation) to pay the employee's relative's bill, then there is no tax consequence to the minister. We have written many blog posts on benevolence; we suggest readers type the word "benevolence" in the search bar of this blog, or go to the Labels section on the right side of the page and click on "Benevolence."

  3. The church needs to be sure that it is not disguising compensation to the minister. At times, church's have felt that they have not provided fair compensation for employees; this feeling may appear in churches where the minister's family has experienced financial stress because of a medical condition. The church in the question here must be careful that it is truly carrying on a benevolent cause and not disguising compensation to its minister. 

December 02, 2014

MinistryCPA Makes List of Top 50 Accounting Blogs

It is our privilege to announce that our blog has been chosen as one of the 50 Best Accounting Blogs of 2014 by Accounting Degree Review.

Accounting Degree Review ranks and reviews the best accounting degree programs in the country. As a helpful resource, they decided to provide their readers with the 50 Best Accounting Blogs of 2014. MinistryCPA is mentioned in the "Profit and Non-Profit Businesses" section of the article.

Our blog has seen substantial growth through the years, as we recently passed 200,000 page views. The mission of the blog has always remained the same: to answer questions given to us by ministers and others serving in Christian ministries who are advancing the gospel of Jesus Christ.

November 26, 2014

Year End Donations for Next Year's Projects

Question:

At the end of each calendar year, a church has several members who make cash contributions to projects which the members have pledged to support in the upcoming year. The church uses the modified cash basis of accounting. Believing that IRS regulations so require, the church's year end statement includes the donation even though it is designated for the next year. 

For book purposes, can the church record the donation in a liability account as a "prepaid donation" rather than recognizing it as income in the year of receipt? 

Answer:

Taxpayers' donations are considered to be on a cash basis, so the understanding above is correct: the donor's year-end statement must include the donation even though it is designated for a project the church will emphasize in the next year. 

If the church's financial statements are for internal purposes only (and they likely are since the modified-cash basis is not consistent with full-accrual GAAP accounting that is required for many external reporting purposes), booking it as a prepaid-donation accomplishes the objective of delaying recognition of the income until the next year. 

If the church's purpose is to delay recognition, booking it to a prepaid-donation liability account accomplishes this objective. 

November 24, 2014

403(b) Contribution Limits for 2014 and 2015

Generally, contributions to an employee's 403(b) account are limited to the lesser of:
  • the limit on annual additions, or
  • the elective deferral limit
The limit on elective deferrals - the most an employee can contribute to a 403(b) account of salary - is $17,500 in 2014. The elective deferral limit for 2015 will be $18,000. 

Employees who are age 50+ at the end of the calendar year can also make catch-up contributions of $5,500 in 2014 and $6,000 in 2015 beyond the basic limit on elective deferrals.

The limit on annual additions (the combination of all employer contributions and employee elective deferrals to all 403(b) accounts) generally is the lesser of:
    • $52,000 for 2014 ($53,000 for 2015), or
    • 100% of includible compensation for the employee's most recent year of service. 
Generally, includible compensation is the amount of taxable wages and benefits the employee received in the employee's most recent full year of service. If you 403(b) plan doesn't limit the total employer and employee contributions to the annual limits, find out how to correct this mistake.

November 18, 2014

Tax Considerations When Using Amazon Affiliate Program

Question:

Our non-profit organization (NPO) participates in the Amazon affiliate program. We offer books on our website specifically related to our organization's exempt purpose. In addition, we also provide a link for individuals to purchase other non-related items from the Amazon website. 

Are there any tax considerations our NPO needs to be aware of?

Answer:

There are three conditions that must be met in order for certain income producing activities to be taxed as Unrelated Business Tax Income (UBTI). Those three conditions that determine if an activity generates unrelated business income (UBI) are the following:
  1. Is the activity a trade or business?
  2. Is the activity regularly carried on?
  3. Is the activity not substantially related to the exempt purpose?
If the answer is yes to each of the above conditions, it is likely the income producing activity is subject to UBTI, as defined under Internal Revenue Code Sections 512 and 513.

We are familiar with a couple ways of using the Amazon affiliate program that result in tax considerations. First, If an organization sells or advertises goods that are directly related to and further the organization's exempt purpose, these types of sales are likely not subject to UBTI even though conditions No. 1 and 2 above are met (1995 IRS Letter Ruling 9550003).

Second, if the organization is receiving commissions when individuals "shop for other items," the commissions would be subject to UBTI. If gross income from unrelated sales is less than $1,000, then a UBTI return would not need to be filed or tax be paid.

We suggest that the organization should keep track of the two types of commissions received. 
  1. The commissions for sales relating to the tax exempt purpose can be considered program-related commission income. 
  2. The other commissions would be considered unrelated commission sales; if these sales hit $1,000, then a UBTI return (Form 990-T) is needed.
As always, we recommend the organization to contact their tax professional and request guidance through this situation. 

November 14, 2014

Court Ruling Update on Housing Allowance

Yesterday, the Chicago-based 7th Court of Appeals rejected a case brought by the Freedom From Religion Foundation (FFRF) that would have declared tax-exempt housing allowances unconstitutional. The court overturned a previous ruling in favor of FFRF by claiming that FFRF lacked "standing" because the law did not affect them. 

Had the court of appeals upheld the previous ruling, thousands of clergy would have been affected by an increase in income taxes.

This news comes as an encouragement to us at MinistryCPA and to the clients we serve. Although FFRF vows to appeal their case to the Supreme Court, the court of appeal's decision sets a strong precedence in favor of clergy.

November 13, 2014

Can a Motorhome Qualify as a Principal Place of Residence?

Question:

I am a minister and I have lived in a parsonage for 40 years. I hope to retire soon and travel around as a non-paid volunteer to assist small churches in rural areas. 

I am considering buying a motorhome (or RV). Can a motorhome qualify as a principal place of residence?

Answer:

Many individuals who own a motorhome ask this similar question: "Can my motorhome count as my second home?" The reason people ask this question is because there are tax benefits to claiming a motorhome as a second (or only) home. For example, the interest on a loan for the motorhome can qualify as a tax deduction, and an individual may be able to deduct a portion of the sales tax paid on a new motorhome. Also, some states allow a portion of the RV's vehicle registration to be deducted. 

There are a few basic requirements that must be met to claim a motorhome as a second (or only) home. For example, it must have on-board permanently mounted sleeping, eating, and bathroom facilities; these characteristics fulfill the IRS definition of a "dwelling unit." 

Additionally, owners who use their motorhomes for business purposes may be able to deduct some of their travel expenses and depreciation on their motorhome. We recommend you see your tax professional to see if you qualify and to find out what records you need to keep.   

November 10, 2014

The Fee You Pay if You Don't Have Health Coverage

Over the past few weeks, we have written on the requirements to comply with the Affordable Care Act. If an individual does not have insurance that qualifies as minimum essential coverage, the individual will pay either a percentage of his or her household income or a flat fee -- whichever is higher. The figures below are taken from HealthCare.gov.

2014 Fee

If you don't have coverage in 2014, you will have to pay the higher of these two figures:
  1.  1% of your yearly household income
    • The maximum penalty is the national average premium for a bronze plan
  2. $95 per person for the year ($47.50 per child under 18)
    • The maximum penalty per family who chooses to use this method is $285
2015 Fee

If you don't have coverage in 2015, you will have to pay the higher of these two figures:
  1.  2% of your yearly household income
    • The maximum penalty is the national average premium for a bronze plan
  2. $325 per person for the year ($162.50 per child under 18)
    • The maximum penalty per family who chooses to use this method is $975
After 2015

The fee will increase each year. In 2016, the fee will be 2.5% of income or $695 per person. 

October 31, 2014

Can You Claim a Housing Allowance for Two Homes?

Question: 

A minister recently accepted a call to a new ministry where he and his family are staying in the church parsonage. 

Meanwhile, the minister's home in the previous location is unsold. The minister is responsible for payments, taxes, and so forth, on the unsold home in the previous location. 
 
Can the minister claim a housing allowance on the unsold home? 

Answer:

The Ministers Audit Techniques Guide states that "A minister can receive a parsonage allowance for only one home." Many ministers own two homes due to the fact that the minister has accepted a position in a different community and has yet to sell his previous home (similar to the question above). 

Not only may a minister receive a housing allowance for only one home, but that home must be the minister's principal residence. A key term to understand here is the phrase "principal residence," which can be defined as the home where an individual is currently residing.  

So, in the situation above, the minister cannot claim a housing allowance on the unsold home. However, it is not a "lost cause" for the minister and his family. If living in a parsonage, the minister is allowed a small designated allowance to cover utilities and other housing expenses. Additionally, the minister must take into consideration the fair rental value of the property when reporting self-employment earnings for sake of the self-employment tax. 

Read about the controversial "Driscoll court ruling" that helped define the current IRS stance concerning a minister being able to receive a parsonage allowance for only one home. 

Also, we wrote a similar blog post concerning this matter on September 18, 2009:
Two residences for Housing Allowance Purposes? 

Health Insurance Marketplace - Exempt Based upon Membership in Health Care Sharing Ministry

Question:

According to HealthCare.gov, some individuals who don't have a qualified health insurance plan may be exempt from making the individual shared responsibility payment. I was reading the list of exemptions, and one of them stated an exemption for a member of a recognized health care sharing ministry.

What is a recognized health care sharing ministry? And what do I have to do in order to qualify for the exemption?

Answer:

A few days ago, we gave an overview of all the exemptions from the fee for not having health coverage. One of the exemptions we mentioned was based upon being a member of a recognized health care sharing ministry.

According to HealthCare.gov, a health care sharing ministry is "an organization whose members share a common set of ethical and religious beliefs and share medical expenses among themselves in accordance with these beliefs." The most common health care sharing ministries are Samaritan Ministries and Christian Healthcare Ministries.

H.R. 3590: U.S. Patient Protection and Affordable Care Act [26 U.S.C. 5000A(d)(2)(B)(ii); p. 128] details the federal definition of a recognized health care sharing ministry. Below is a summary of the characteristics that qualify a health care sharing ministry as being recognized by the federal government:
  • Must be a 501(c)(3) organization
  • Members must share common ethical or religious beliefs
  • Must not discriminate membership based on state of residence or employment
  • Members cannot lose membership due to development of a medical condition
  • Must have existed and been in practice continually since December 31, 1999
  • Must be subject to an annual audit by an independent CPA which must be publicly available upon request 
In order to qualify for this exemption, you have two options:
  1. You can claim this exemption when you fill out your 2014 federal tax return which is due in April 2015.
     

  2. You can follow the instructions on this application form and submit it to the Marketplace (same as HealthCare.gov). The instructions note that after the application form is submitted, you should hear back within 1-2 weeks concerning whether or not you have been granted the exemption. If you get an exemption from the Marketplace, you must keep the letter that the Marketplace sends you with your exemption certificate number (ECN). You will need the ECN when filing your personal federal taxes. 

October 29, 2014

Health Insurance Marketplace - Exempt Based Upon Hardship

Question:

According to HealthCare.gov, some individuals who don't have a qualified health insurance plan may be exempt from making the individual shared responsibility payment. I was reading the list of exemptions from the penalty, and I noticed one of them was called a hardship exemption.

What is meant by hardship? And what do I have to do in order to qualify for the exemption?

Answer:

Yesterday, we gave an overview of all the exemptions from the fee for not having health care coverage. One of the exemptions we mentioned was based on hardship.

Below are just a few of the circumstances that may qualify you for a hardship exemption. If you would like to know all 14 circumstances of hardship that might qualify an individual to be exempt from the fee, you can read the list at HealthCare.gov.
  1. You received a shut-off notice from a utility company
  2. You filed for bankruptcy in the last 6 months
  3. You experienced unexpected increases in necessary expenses due to caring for an ill, disabled, or aging family member
  4. You recently experienced the death of a close family member
  5. You had medical expenses you couldn't pay in the last 24 months that resulted in substantial debt
  6. Your individual insurance plan was cancelled and you believe other Marketplace plans are unaffordable
  7.  You experienced another hardship obtaining health insurance

In order to qualify for a hardship exemption, you must follow the instructions on this application form and submit it to the Marketplace (same as HealthCare.gov). The instructions note that after the application form is submitted, you should hear back within 1-2 weeks concerning whether or not you have been granted the exemption. 

If you get an exemption from the Marketplace, you must keep the letter that the Marketplace sends you with your exemption certificate number (ECN). You will need the ECN when filing your personal, federal taxes. 

October 28, 2014

MinistryCPA Special Topic: Exemption Overview for the Health Insurance Marketplace

The "shared responsibility payment" started in 2014, which means that every person needs to have health insurance or make a payment (a nice way of saying a fee) on his or her federal income tax return. However, HealthCare.gov lists some exemptions that may allow individuals to avoid making this payment. Below, we have broken down the various exemptions while describing the different ways to apply for them.

Several of the exemptions can be claimed in one of two ways: (1) either when you file your federal tax return for the year or (2) when you apply for the exemption early through an application form. The following exemptions can be claimed by either of the two options previously described:
  1. Exemptions based on coverage being unaffordable
  2. Exemptions for membership in a health care sharing ministry
  3. Exemptions for membership in a federally-recognized tribe
  4. Exemptions for being incarcerated
The following three exemptions can only be claimed in advance through an application form and not when you file your federal tax return:
  1. Exemptions based upon hardship
  2. Exemptions based on eligibility for services through an Indian health care provider
  3. Exemptions for membership in a recognized religious sect whose members object to insurance
The last three exemptions have special situations:
  1. Exemptions based on low income: If your income is low enough and you do not need to file a tax return, you do not need to apply for an exemption.  
  2. Exemptions based on coverage gap: If you have a gap in coverage of less than 3 months, you do not need to apply for an exemption.
  3. Exemptions based upon illegal presence in the U.S.: If you are not lawfully present in the U.S., you do not need to apply for an exemption.
If you do not qualify for these exemptions and if you do not have a qualified health insurance plan, here are the fees you will have to pay on your federal tax return. 


October 23, 2014

Age Limits for IRA Contributions

Question:

Up until what age can I contribute to my Traditional IRA or Roth IRA?

Answer:

As long as all other requirements are met, a person can contribute to his or her Traditional IRA until that person reaches the age of 70.5 years.

Roth IRAs are different in that contributions can be made regardless of age; there is no "age limit." 

Although a lengthy document, IRS Publication 590 is a great resource concerning Individual Retirement Arrangements (IRAs).

 

October 22, 2014

Milestone - 200,000 Page Views



Earlier today, we reached 200,000 total page views on this blog! 

In late 2007, Dr. Corey Pfaffe, CPA, began this blog with the purpose of answering financial and tax questions asked by ministers and others serving in Christian ministries. It took us until March 14, 2013 to get 100,000 total page views. Now, only nineteen months after that first milestone, we have reached 200,000 page views. 

Thank you to everyone who has used this blog and has helped us reach this milestone. We hope that MinistryCPA has been of service to you and that our posts continue to help guide you in ministerial and ministry tax issues. We look forward to serving you in the future and reaching our next milestone!

Corey Pfaffe - CPA, Principal
Tara Watterson - CPA, Senior Accountant
Laurie Pfaffe - Office Administrator
Kyle Kutz - Accounting Associate 

October 17, 2014

Cautions for a Church Serving as a Missions Agency

Question:

Our church is thinking about acting as a missions agency by directly supporting some missionaries. Do you see any concerns with doing this?

Answer:

In the past, we have provided blog posts concerning how churches have chosen to serve as missions agencies. Recently, however, we have deepened our research and discussion concerning this complex topic. Our research and experience has provided some additional cautions about a church taking on the responsibilities of a missions agency. 

Regulations for missionaries continue to become more complex. Unless a church is willing and able to thoroughly research and act in accordance with these regulations, we strongly discourage churches from acting as missions agencies. We fear that either the church or the missionary will not have the expertise to comply with the law. 

Recently, the following topics have added to that complexity:
  • Affordable Care Act
  • Foreign Bank Account Reports (FBARS)
  • Payments to foreign nationals
  • Retirement plans
  • Employee vs. contractor classifications
  • Payments to foreign charities
  • Foreign Account Tax Compliance Act (FATCA)
  • Expense reimbursement plans
Before making a decision to act as a missions agency, we strongly suggest that a church consider contacting us or its own professional advisor. 

October 10, 2014

Top Ten Q&A Update

 We have recently updated our Top Ten Questions that Ministers, Missionaries, and Church Treasurers Ask Tax Preparers

Based on our experience, the Top Ten Questions are frequent questions asked by ministers, missionaries, church treasurers, and others serving in ministry positions as licensed or ordained ministers. Our answers are not intended to be exhaustive. Accordingly, you should consult your own tax professional for assistance in applying our information to your specific situation. 

The "Top Ten Q&A" has been our most hit web page since 2010. Providing a helpful resource to many who are involved in ministry, it averages close to 1,000 page views every two weeks. 

If you prefer to download a PDF of our Top Ten Questions, click here


October 03, 2014

Cell Phone Reimbursement by Church

Question:

One of our pastors recently upgraded his iPhone and submitted for reimbursement through a professional account. Is it proper for the church to refund him fully as a non-taxable reimbursement? 

Answer:

The italicized excerpt below is taken from IRS Publication 15-B. We have added some of our own comments, which are in parenthesis and underlined. 

The value of an employer-provided cell phone, provided primarily for noncompensatory business reasons, is excludable from an employee's income as a working condition fringe benefit. Personal use of an employer-provided cell phone, provided primarily for noncompensatory business reasons, is excludable from an employee's income as a de minimis (non-taxable) fringe benefit. 

Noncompensatory business purposes. You provide a cell phone primarily for noncompensatory business purposes (the cell phone should not be a disguised way to give the pastor more compensation) if there are substantial business reasons for providing the cell phone. Examples of substantial business reasons include the employer's:
  • Need to contact the employee at all times for work-related emergencies (certainly seems to fit the description of most pastors)
  • Requirement that the employee be available to speak with clients at times when the employee is away from the office (also appears to apply to most pastors), and 
  • Need to speak with clients located in other time zones at times outsides the employee's normal workday. 

Basically, the IRS is saying that organizations are not required to report employer-provided cell phones as income to its employees as long as the cell phone is provided primarily for noncompensatory business purposes. If the iPhone is the pastor's only personal phone, then Publication 535 would likely lead to the conclusion that it was not primarily for noncompensatory business purposes. 

So then who reports the expense of the phone?

An individual can deduct certain un-reimbursed employee expenses on his/her tax return under certain circumstances. When considering the reimbursement of the phone upgrade, the pastor and church should keep in mind the following items:
  • The person or organization who pays the expenses is the one who gets to deduct them. So, if the church pays for an expense or reimburses the pastor for one, the pastor cannot take a deduction for that expense. 
  • If the pastor pays for his own expenses and doesn't get reimbursed, then he might be able to deduct them on his tax return. However, there are some limitations and restrictions on what and how much he can deduct. 


September 12, 2014

Journal Entries for Land Acquisition - Modified Cash Basis

Question:

A church is in the process of purchasing property and wants to use the modified cash basis. The church plans to pay for part of the property with cash while financing the remainder of the payments through a long-term note. What are the debit and credit effects of the following hypothetical scenario?

Hypothetical Scenario:

The property that the church desires to purchase costs $100,000. The church is able to pay $50,000 with cash, meaning that the remaining $50,000 will be financed through a long-term note. The church expects to pay monthly payments of $500 on the long-term note. 

Answer:

The modified cash basis, as we recommend its application, includes no long-term assets or liabilities on the balance sheet. Therefore, the journal entries for the above scenario are as follows:

*Capital Expenditures (debit)                          $50,000
          Cash (credit)                                                               $50,000

The above journal entry is the only current entry. However, monthly payments on the long-term note are recorded as follows:

**Long-Term Loan Payments (debit)             $500
            Cash (credit)                                                               $500

While the balance sheet for the church reports no long-term assets or long-term debt, most members of the congregation will be interested to know the status of the reduction in the amount owed on the long-term note. We recommend that the reports to the congregation include a recap of loan activity. In our example, the first year report would likely include a beginning balance of $50,000. The principal portions of the $500 monthly payments that are subtracted (the remaining portion being interest cost) should result in an ending loan balance equal to the remaining debt. 

We encourage our viewers to read the following blog post that we published in June of 2013:


*An expense account used only on a rare occasion such as this.
**An expense account that can and should be provided a general fund budget.

Donating a Timeshare Vacation to a Pastor

Question:

A member of our congregation owns a timeshare at a resort. He would like to donate a two week stay at the timeshare to our pastor. This situation leads me to ask the following questions: 

1)    The donor is requesting a deductible contribution letter. Is it appropriate for us to give him one?
2)    Is this situation taxable to our pastor?

Answer:

1)    There is little difference between this situation and donating one’s services. Remember, there is no deduction for donating one’s services. Similar to donating one’s services, the tax benefit of what this donor is contemplating is limited to the following:
  • He does not have to report income that he does not receive since he will collect no rent from the pastor.
  • However, we believe it is appropriate to provide a letter thanking the member for making his timeshare available. The letter should not be prepared on church letterhead; instead, it should be prepared and sent from the pastor himself.
  • Further, this is not an action taken by the pastor’s employer (it is not a corporate action taken by the church). A reminder of what is meant by “corporate action” and how it affects the deductibility of donations may be read at the following three blog posts that were published in the past:
2)    This situation is not taxable to the pastor. The pastor provided no services to the congregation (his employer) for which he is receiving this favor.

September 08, 2014

Housing Allowance and the Premium Tax Credit



Question:

Am I supposed to include my minister’s housing allowance when determining household income for the Health Insurance Premium Tax Credit?

Answer:

Per final regulations issued by the IRS and Department of the Treasury on May 18, 2012, household income is calculated as follows.[i]

Taxpayer’s adjusted gross income (AGI)
+All Dependents’ AGI (if required to file a tax return)
+Foreign earned income excluded from AGI
+Tax-exempt interest
+Social Security Benefits not included in gross income
Modified Adjusted Gross Income

The above calculation does not include an adjustment for housing allowance; therefore, the minister’s housing allowance that is excluded from federal tax is also excluded from household income for purposes of the Health Insurance Premium Tax Credit.