Skip to main content

Posts

Showing posts from 2015

MinistryCPA Special Topic: Starting a WI Small Business

The State of Wisconsin launched a One Stop Business Portal to assist individuals in establishing a business in Wisconsin. The portal’s web address is www.openforbusinesswi.com. The portal walks the individual through the following steps.
Entity RegistrationBusiness Tax Registration, which can include a seller’s permit and employee withholding tax numberUnemployment Insurance Assessment
In addition, the website offers an Expanding Your Business page that reviews worker’s compensation requirements.

We have walked many clients through the process of starting a business, and the process can be a bit daunting to the client because of new terms, multiple registration websites, and lots of steps to complete the process. Maybe this Wisconsin portal is the beginning of a one-stop location to learn state requirements and to set up a new business.


2016 Standard Mileage Rates

The IRS issued the 2016 standard mileage rates. These rates for the use of a car (also vans, pickups or panel trucks) begin on January 1, 2016.
54 cents per mile for business miles driven, down from 57.5 cents for 201519 cents per mile driven for medical or moving purposes, down from 23 cents for 201514 cents per mile driven in service of charitable organizations More information is available on the IRS’s webpage.

Office-in-home Deduction for Overseas Missionary

Question:

I am a missionary overseas. I do not have an office at church, but I use a portion of my home as an office. What are the requirements for an Office in Home deduction?

Answer:

A home office qualifies for a deduction if the space is used “exclusively and regularly as your principal place of business” according to IRS Publication 587. In order to fulfill the exclusive use test, the office area must be limited to a separate and recognizable area that is limited only by business use. For example, if your wife and children use a desk in the corner of the living room for homeschooling and you use the same desk for ministry work, the entire living room office space is disqualified from the deduction since you partake in both personal and business use in the area. In order to fulfill the regular use test, the office space must be used on a consistent, regular basis. If the space is used only occasionally, it is disqualified from the deduction.

However, if the desk and additional off…

Church Commissioning a Missionary

Question:

What would constitute “duly commissioned” in the case of a church commissioning a missionary for ministerial service outside of the immediate context of the sending church? In addition, how is a commissioning substantiated to the IRS?

Answer:


Denomination polity differs on who is considered “duly ordained, commissioned, or licensed.” For example, Independent Baptist churches, in general, believe from a theological standpoint that only a local assembly of believers in Jesus Christ can recognize the call to the gospel ministry upon a qualified member of the church. The IRS has readily accepted this type of recognition as well. While the process of becoming ordained, commissioned, or licensed may differ, some churches do not differentiate between ordination, commissioning, or licensure for granting authority or recognizing a minister’s call to the gospel.

Missionaries are often ordained, commissioned, or licensed by a local church in anticipation of ministering outside of the s…

Commissioned Missionary and Housing Allowance

Question:

I am a commissioned missionary of a local church. Do I qualify for a housing allowance tax exclusion?

Answer:

In order for any missionary or minister to qualify for a housing allowance, the individual must fit the IRS’s definition of a minister. Let’s review the qualifications of ministerial treatment as noted in the IRS’s Minister Audit Technique Guide.
Treas. Reg. § 1.1402(c)-5(b)(2) provides that service performed by a minister in the exercise of the ministry includes:

1. Ministration of sacerdotal functions;

2. Conduct of religious worship;

3. Control, conduct, and maintenance of religious organizations (including the religious boards, societies, and other integral agencies of such organizations), under the authority of a religious body constituting a church or denomination.

Treas. Reg. § 1.1402(c)-5(b)(2) also provides that whether service performed by a minister constitutes conduct of religious worship or ministration of sacerdotal functions depends o…

Proposed Change for Donor Written Acknowledgements

Question:

I recently attended a conference, and the speaker mentioned that donor social security numbers will need to be collected in the future. The social security numbers will then be included on donor contribution acknowledgements. Is this true?

Answer:

This is partly true. Published on September 17, 2015, the IRS issued proposed regulations for donee reporting. At the date of this blog posting, the regulations are still only proposed. In addition, if the regulations become final, the donee reporting with donor social security numbers will remain optional.

If a nonprofit chooses to use the optional donee reporting, the nonprofit will (1) file a specific-use form with the IRS by February 28 for contributions made in the prior calendar year and (2) provide a copy to the donor by the same February 28 date. The nonprofit will report on the IRS’s specific-use form all current required information (e.g., amount of cash, no goods or services disclosure) and the new required information: …

Health Coverage and IRS Forms

Question:
I expect to have health insurance coverage for some or all of this year. What form(s) should I expect to receive in January?
Answer:
More than likely you will receive one or more Forms 1095-A, 1095-B, or 1095-C. You will use the Forms 1095 to report your Minimum Essential Coverage on your tax return. What forms you receive will depend on where you received health insurance coverage and on your size of employer.
You will receive Form 1095-A if you have coverage through the Federal or a State Marketplace.*You will receive Form 1095-B if you receive coverage from your employer who has fewer than 50 full-time employees or if you self-purchased coverage through the individual insurance market (not the Marketplace).*You will receive Form 1095-C if you receive coverage from your employer who has 50 or more full-time employees.*
You should receive your form(s) each year by January 31. But certain employers could request a 30-day extension.
Something to keep in mind… you could receive a…

1099-MISC Ministers and 403(b) Plans

Question:
I am treated as a 1099-MISC self-employed contractor by my U.S. mission agency. Should I consider establishing and contributing to a 403(b) retirement plan? Am I eligible? 
Answer:
This blog post will deal with the issue concerning a self-employed minister’s eligibility to establish a 403(b). Please bear with the very technical nature of this post.
Starting with IRS Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans), we see two conflicting statements when taken at face value.
First Statement: “The following ministers are eligible employees for whom a 403(b) account can be established… Self-employed ministers. A self-employed minister is treated as employed by a tax-exempt organization that is a qualified employer.”
Second Statement: “Who Can Set Up a 403(b) Account? … A self-employed minister cannot set up a 403(b) account for his or her benefit. If you are a self-employed minister, only the organization (denomination) with which you are associated can set up an account…

Can I Deduct Travel Costs for a Mission Trip/Vacation?

Question:

How do I determine "significant personal time" when I am on a mission trip? Example: I travel overseas for a mission trip and work one week full-time for the mission. The next week, I explore and vacation in the area. As a charitable contribution, can I deduct any part of my airfare, lodging,  and food during the week I worked? Or have I lost the whole amount because I vacationed?

Answer:

Although the terms "significant personal time" in the question are not given specifically in IRS Publication 526, Charitable Contributions, the publication does describe when traveling costs are deductible for charitable purposes. Here is a quote from page 5 of the publication:
Generally, you can claim a charitable contribution deduction for travel expenses necessarily incurred while you are away from home performing services for a charitable organization only if there is no significant element of personal pleasure, recreation, or vacation in the travel.However, the publicat…

Midyear Housing Allowance Increase

Question:

A pastor has requested that the church increase his housing allowance for the rest of the year. Is it permissible for the church to change the pastor's housing allowance midyear?

Answer:

The minister's church or other qualified organization must designate the housing allowance pursuant to official action taken in advance of the payment. The new designation must be made prospectively, not retrospectively. In other words, the pastor can claim the new housing allowance designation only on the remaining pay periods of the year. 

There is often a prorated calculation that must take place when midyear housing allowance changes occur. Here is an example:

For 2015, Pastor Smith's salary is $48,000 ($4,000 per month). Of the $48,000, the church has designated a housing allowance of $12,000 ($1,000 per month). 

In June of 2015, Pastor Smith realizes that his actual housing expenses and the fair rental value of his home will far exceed $12,000 during the calendar year 2015, so h…

Church Pays for Camp Fee - Is it Taxable?

Question:

Our church pays 100% of registration fees for our pastor staff's children to attend youth camp in the summer. The children of the staff do not have to complete an application to get the full registration scholarship. Staff children are responsible for paying their transportation fee. Would the cost of the camp registration be considered a taxable fringe benefit to the pastor? 

Answer:

Tax-free fringe benefits are so classified based on statutory authority. To our knowledge, there is no statutory authority on this benefit based to be nontaxable.

While the benefit is certainly generous and most likely appreciated by the staff families, the policy's current state leads to taxable income.

If staff members are receiving this benefit similar to other families of the church, however, it may be possible for them to enjoy tax-free assistance. For example, the church could establish a scholarship fund to sponsor children and teens of the church or local community to attend summer c…

Line Items of Church Budget

We (MinistryCPA) were recently asked our opinion on the setup of a church's budget.

Question:

A church wants to know if their budget should individually list the compensation of each staff person instead of combining employee salaries/wage for each type of employee that the church employs. For example, the church budget has a line for the pastor, youth minister, church secretary, etc., but then the budget combines all the part-time employees, such as nursery and accompanists. There have been discussions concerning the privacy of the employees, so how detailed should each line item be?

Answer:

In our experience, churches use a wide array of practices when it comes to budget and personnel. One extreme is including each employee's pay--even a breakdown of the compensation package. The opposite extreme is one number on the budget for the total of all the compensation, including benefits, of all the employees. 

We like the approach of developing a budget on a per-program basis. For exa…

In-home Meal and Entertainment Expenses

Question:

A church pastor is wondering how to deduct meal and entertainment expenses when he and his wife host gatherings at their house. Is there a set amount he can deduct for each meal served? Or does he need to deduct the actual costs? 

Answer:

Meal and entertainment expenses are deductible or reimbursable (by the employer) if they are ordinary and necessary and are either directly related to or associated with the pastor's responsibilities. If the pastor is reimbursed by the church, he cannot claim the expenses as a deduction.

Since it is difficult to precisely document the cost of meals served in the home, a reasonable cost per meal is generally allowable. Here is a quote from page 67 of Worth's Income Tax Guide for Ministers, 2012 Edition

A reasonable amount per meal, depending on your actual circumstances and services practices, might vary between $8.00 to $11.00 per meal. Those afternoon meetings with refreshments, or after evening service snacks for the youth group, et…

403(b) Employer Contributions - Subject to FICA Tax?

Question:

Are 403(b) retirement plan contributions made on behalf of the minister by the church subject to FICA tax? (The amount contributed was not deducted from the minister's salary; it was made by the church as an employee benefit.)

Answer:

Simply put, employer contributions are not subject to FICA tax.

However, this is a good opportunity to review elective deferrals. Elective deferrals are monies chosen by employees to be deducted from their paychecks and contributed to the employer-sponsored retirement plan. 

Non-minister employees who choose elective deferrals do not reduce the amount of FICA wages that need to be reported. In other words, the elective deferrals are subject to FICA tax. 

Ministerial employees are not subject to FICA tax in the first place (read our March 21, 2011 blog post for more info). Therefore, any monies the minister defers to the employer-sponsored retirement plan are not subject to FICA tax. 

For a review on the 403(b) contribution limits for 2014-2015, r…

Church Plan: 401(k) or 403(b)?

Question:

According to Revenue Rulings 58-359 and 63-156, retirement distributions to a pastor may be designated as housing allowance if they come from a church plan. Does a 401(k) plan sponsored by the church qualify as a church plan?

Answer:

Normally, non-profit organizations set up 403(b) retirement plans for its employees while for-profit organizations establish 401(k) retirement plans. For churches, one of the benefits of implementing a 403(b) plan is that the retirement distributions to a pastor can be designated as a housing allowance (tax-free compensation). Here are a couple of blog posts that we have written on the matter:

403(b) Retirement Distributed as Housing Allowance
Housing Designation of 403(b) Plan Retirement Distributions

According to The Minister Audit Techniques Guide, "...the retired minister may exclude from net earnings from self-employment any retirement benefits received from a church plan (our emphasis). Rev. Rul. 58-359, 1958-2 C.B. 422." 

So that leads…

Review: Form 1099 Payments to 501(c)(3) Organizations

Question:

A church rented space from another church last year. Should it request a completed Form W-9 and issue Form 1099-MISC?

Answer:

We have written similar blog posts on this topic in the past (listed below), but we figured it was a good time for a review. 

Payments from one 501(c)(3) organization to another 501(c)(3) organization are not subject to Form 1099-MISC reporting. The 2015 Instructions for Form 1099-MISC state that "payments to a tax-exempt organization" are exempt from reporting a Form 1099-MISC. 

The following are typical examples of payments of $600 or more by a church which are subject to reporting a Form 1099-MISC:
Rent paid to an individual (non-corporation)Payments for services rendered by individuals who are not employees (e.g. janitorial service, facilities, snow removal, guest speakers)Support sent directly to missionariesHere are some similar blog posts that we have written in the past:

Form 1099 for Payments to Other Ministries
Form 1099 for Non-profit?
Fo…

When a Minister Earns Non-Minister Wages

Question

A church has recently hired a minister who will also work 5-10 hours each week as the church's custodian. Are all of the minister's wages exempt from FICA? Are there any issues the church should consider when issuing the minister his W-2? 

Answer

The church must understand that the minister is exempt from FICA taxes only for wages he earns performing ministerial duties. 

A review of the definition of a minister is helpful. The Internal Revenue Service's Minister Audit Technique Guide states the following:

Treas. Reg. 1.1402(c)-5(b)(2) provides that service performed by a minister in the exercise of the ministry includes:
Ministration of sacerdotal functions;Conduct of religious worship;Control, conduct, and maintenance of religious organizations (including the religious boards, societies, and other integral agencies of such organizations), under the authority of a religious body consulting a church or denomination.If the minister performs other duties for the church tha…

Religious Exemption from "Shared Responsibility Payment"

Question:

What qualifies as a religious exemption from the shared responsibility payment that individuals must pay if they do not have qualified health insurance? 

Answer:

Those who have stayed current with our blog have educated themselves on the fee ("shared responsibility payment") they will have to pay on their 2014 tax return if they do not have minimum essential health insurance. In our October 28, 2014 post, we gave an overview of the exemptions from the "shared responsibility payment." 

In our October 31, 2014 post, we discussed how health care sharing ministries offer the most common exemption that our readers may qualify for. A separate exemption, officially listed on HealthCare.gov, states that an individual does not have to pay the fee if the individual is "a member of a recognized religious sect with religious objections to insurance, including Social Security and Medicare." 

Deciphering who qualifies for this religious exemption may sound a littl…

Health Care Sharing "Premiums" Do Not Qualfiy for Cafeteria Plans

Question:

Is it legal to use a Section 125 cafeteria plan or Health Reimbursement Arrangement (HRA) to pay the monthly "premiums" ("share payments") of a health care sharing ministry?

Answer:

First, let's discuss what a cafeteria plan is... Generally, the terms "Section 125 plans" and "cafeteria plans" are synonymous. According to a page on the  IRS website, a cafeteria plan is a separate written plan maintained by an employer for employees that meets the specific requirements of and regulations of Section 125 of the Internal Revenue Code. It provides participants an opportunity to receive certain benefits on a pretax basis. Participants in a cafeteria plan must be permitted to choose among at least one taxable benefit (such as cash) and one qualified benefit.

Second, let's discuss what an HRA is... An HRA is a tax-advantaged benefit that allows both employees and employers to save on the cost of healthcare. HRA plans are employer-funded med…

IRS Determination Letter for Church

Question:

Does a church need an IRS Determination Letter?

Answer:

Generally, a church is already considered tax exempt and is eligible to receive tax-deductible contributions; therefore, a determination letter is not needed. But sometimes a church does need an IRS Determination Letter. To ascertain if a church needs a letter, the church should consult an attorney or CPA. 

Requesting a 501(c)(3) IRS Determination Letter can be a time-intensive and costly process, if a letter is needed. Form 1023 needs to be filed to request the determination letter. The IRS's filing cost for Form 1023-EZ is $400. If a full Form 1023 is needed, the filing costs are higher. We encourage any nonprofit to work with a law firm or CPA firm when filing the Form 1023.

Here is an excerpt from the Form 1023 Instructions:
Form 1023 not necessary. The following types of organizations may be considered tax exempt under section 501(c)(3) even if they do not file Form 1023. 
Churches, including synagogues, temples, and …