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Showing posts from September, 2016

A Roth 403(b) Contribution Cannot Lower Self-Employment Taxes

Question:

A previous MinistryCPA blog post mentioned that, "In addition, unlike other retirement plan choices (Traditional and Roth IRAs, and for-profit company 401(k) plans), a minister is not subject to the 15.3 percent federal self-employment tax on amounts deferred into 403(b) accounts (IRS Revenue Rulings 68-395 and 78-6)."

Does this exclusion apply to ministers with elective deferrals to Roth 403(b) plans similar to the treatment available when contributing to pre-tax 403(b) plans?

I can see how this works easily for pre-tax 403(b) plans since Form W-2, Box 1 (total compensation) does not include the contributions as income. Accordingly, Schedule SE self-employment tax based on Box 1 is not assessed.

Answer:

We know of no IRS Revenue Rulings or authoritative IRS publications that would permit the reduction of SE tax through Roth 403(b) contributions.

Compare a traditional 403(b) contribution with a Roth 403(b) contribution displayed on Form W-2. Assumptions: $50,000 total …

403(b) Contribution Calculations Exclude Housing Allowance

Question:

Should 403(b) contributions and the subsequent match be based on the pastor's total income from the church (including housing allowance) or just from the salary minus housing allowance?

Answer:

According to Richard R. Hammar, J.D., LL.M., CPA, in his book 2015 Church & Clergy Tax Guide, “Section 107 of the tax code specifies that a minister’s housing allowance (or the annual rental value of a parsonage) is not included in the minister’s gross income for income tax reporting purposes. Therefore, it would appear that the definition of includible compensation for purposes of computing the limit on annual additions to a 403(b) plan would not include the portion of a minister’s housing allowance that is excludable from gross income." 

Hammar's Church Law and Tax Report is an excellent resource that many ministries should consider as annual subscribers.


Coffee Shop as an "Integrated Auxiliary" of a Church

Question:

A church helped start a coffee shop which is a separate entity from the church. The primary goal of the coffee shop is to donate the profits to the church. Individuals have donated equipment to the church to establish the business. Can the donors claim charitable contribution deductions for the equipment?

Answer:
Donors of non-cash gifts maybe be entitled to write-offs and should refer to IRS Publication 526 for further details regarding possible deductions.

The question brings up greater concerns than whether the donors can deduct contributions. For example:
Who takes responsibility for any legal compliance or liability concerns?Does the ministry hold a Seller's Permit from the State in which it operates?Is the ministry complying with all IRS and State employment laws for withholding taxes and other regulations?Who is responsible for income taxes on profit, if it happens to fall under the classification as Unrelated Business Income? Internal Revenue Service Publication 526 in…

Minister's Excluded Housing Allowance Income Subject to SE Tax

Question:

A pastor is receiving a $20,000 renting (housing) allowance per year, and he is currently paying Self-Employment (SE) tax on it. Is there a way to exclude this compensation from SE income status?

Answer:

He will not be able to exclude this amount from SE income. IRS Publication 517 states, "To figure your net earnings from self-employment (on Schedule SE (Form 1040)), include in gross income: 1. ... 4. The fair rental value of a parsonage provided to you (including the cost of utilities that are furnished) and the rental allowance (including an amount for payment of utilities) paid to you."

Further, the IRS Minister's Audit Technique Guide offers IRS agents the following guidance:
"Computing Self-Employment Tax
Salaries and fees for services, including offerings and honoraria received for marriages, funerals, baptisms, etc.. Include gifts which are considered income as discussed under the section on income.Any housing allowance or utility allowances.Fair Rental …

Services to a Church in Lieu of Rent of Church Parsonage: Bartering

Question:
A church member rents the church parsonage for $1,000 per month. But in lieu of paying rent, he performs services for the church. 1.) Should the church report his earnings on a Form W-2? 2.) Is the church's tax-exempt status affected by the renting of the parsonage to a non-staff member?
Answer:
The renter must include the $1,000 dollars per month as taxable income, and the church should issue him a Form 1099-MISC if he is an independent contractor or Form W-2 if he is an employee (likely also subject to FICA tax).
The major issue is not that the church will lose its overall tax-exempt status, but that it may lose the real estate tax-free status of the parsonage being rented to a non-staff member. The situation here relates to bartering for services actually performed as a part-time employee of the church, so the concern may be unwarranted.
For information regarding the effect on tax exempt status follow the link below: http://ministrycpa.blogspot.com/2016/07/renting-church-par…

Expenses of Selling Home as Qualifying Housing Allowance Expenditures

Question:

Are expenditures related to the sale of a home considered to be qualifying housing allowance disbursements?
Answer:

The Internal Revenue Code lists only food and servants as specific exceptions to otherwise qualifying housing allowance expenditures. The amounts must be incurred relative to the minister’s principal residence and for costs directly related to providing a home. According to Internal Revenue Regulation §1.107-1, Rental Value of Parsonages, only food and servants are specifically excluded.
With every housing allowance the three part test must be considered (see Ministry CPA Blogpast post regarding the three-part test). For example, if a minister's fair rental value is less than his actual expenses, he would receive no tax benefit from including expenditures from the sale of his home. This is often the case in the event of the sale of a minister's home.

Mission Board Collecting Donations for Ministers' Mission Trips

Question:

If a mission board is receiving monies for an ordained minister from his friends and family in order to fund his mission trip, are those contributions deductible for the donors? Are the monies received by the ordained minister excluded from taxable income?

Answer:

Donor side: The contributions may be deductible for the donors. According to Richard R. Hammar in this book 2015 Church and Clergy Tax Guide, "IF a donor stipulates that a contribution be spent on a designated individual, no deduction ordinarily is allowed unless the church exercises full administrative control over the donated funds to ensure that they are being spent in furtherance of the church's exempt purposes. To illustrate, contributions to a church or missions agency for the benefit of a particular missionary may be tax deductible if the church or missions agency exercises full administrative and accounting control over the contributions and ensures that they are spent in furtherance of the church…

Ministers' Charitable Contributions Donated Pretax as Payroll Deductions

Question:

Can a minister make his contributions pretax through payroll?

Answer:

No, charitable donations may not be taken as pretax through payroll. According to the IRS Minister Audit Technique Guide, “Ministers' contributions to the church are not deductible as business expenses. ...They may still be deducted as contributions on Schedule A, but they may not be used as a business expense to reduce self-employment tax.”