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.