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"Free Labor" in Exchange for Charitable Donations

Question:

A church youth group is going on a missions trip this summer. There a few youth members who have yet to bring in the necessary amount needed for their trip. A couple in the church has offered to give towards their trip in exchange for work around their house. How is this treated? Is this allowable?

Answer:
Our MinistryCPA experience leads us to believe that in most cases the value of the work that is being completed by the youth members is not representative of the donation amount. It often appears to us that the young people are essentially volunteering so that a homeowner will consider making a donation, rather than providing taxable, fair value services. This kind of work is sometimes referred to as a "makework proposition" (e.g. raking leaves, washing windows, trimming hedges).

Source: http://www.samiyouth.org/awesome-job-ideas-teenagers/



Travel for Mission Trip Deductible as Charitable Donation

Question:

A church regularly sends out teams on short-term mission trips to destinations hosted by charitable organizations. They have set up a fund for receiving special offerings and for reimbursing travel, meals, and lodging expenses. Recently, a church team was required to pay the hosting organization a fee for each member to cover meals and lodging. The team leader required each team member to make a donation to the fund in the amount of the fee. Are these donations tax deductible?

Some argue that the team members are receiving a benefit from the donation and should not receive a tax benefit for the donations. Others feel they should qualify for a charitable donation because the benefit they receive only facilitates their charitable work. Besides, can't these expenses be deducted on the individual's Schedule A as out-of-pocket contributions even if the church doesn't consider them a donation?

Answer:

IRS Publication 526 says, "Generally, you can claim a charitable …

Housing Allowance and Form 1099-MISC Reporting

Question:

A church provides its minister a housing allowance, but believes it must report the full amount of compensation (including the non-taxable housing allowance portion) on Form 1099-MISC in order to demonstrate the full earnings of the minister.

If the church reports his compensation, including the housing allowance, on the Form 1099-MISC as taxable income, will he be able to deduct his housing expenses somewhere else on the Form 1040?

Answer:

This question brings up a couple of issues. First, most ministers are properly classified as employees who receive Form W-2, not as independent contractors who receive Form 1099-MISC. Box 1 on Form W-2 reports taxable compensation. It is reduced reflecting the church's designation of a portion of his pay as non-taxable housing. Then, in Box 14 (Other), Form W-2 typically reports as a memorandum item his additional non-taxable, housing allowance compensation.

Alternatively, the minister who receives Form 1099-MISC instead of Form W-2 mu…

Threat to Tax-Exempt Status? Renting Out the Church Parsonage

Question:

A church is looking to rent out its parsonage to a non-staff member. Can the income that is received for the rent be used for church expenses not related to the property without affecting the church's tax-exempt status?

Answer:

The church tax-exempt status will not be affected by the use of the rental income for expenses not related to the property. However, the church may lose its real estate tax exemption for the property because it is not used for an exempt purpose.

There are both potential Unrelated Business Income Tax (UBIT) and local property tax concerns. First, tax-exempt organizations generally do not need to report rental income as unrelated business income (UBI) unless it is financed with tax-exempt debt instruments. According to IRS Publication 598 (Page 10), "Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. Rents from personal property are not excluded." The IRS cites exceptio…

529 Plan Distributions NOT for Education

Question:

A mom and dad established a Internal Revenue Code section 529 college fund for their son, but he has decided to join the military instead. What are the penalties if the parents decide to pull the money out of the 529 college fund to give to him for uses other than college tuition? Does the family pay taxes only on the interest that was made or is the entire distribution treated as taxable income?

Answer:

Before we dive into answering the question it is important to understand that there are two types of 529 plans and that all fifty states and Washington D.C. use at least one of these two plans. The Securities Exchange Commission (SEC) defines both types. First, there are prepaid tuition plans which allow individuals to purchase credits at colleges/universities for future tuition at its current rate. These plans typically do not include room and board.

The second type, which falls in line with our question, is an education savings plan. Under this plan, an individual opens an …

Special Topic: Habits of the Useful Life

Over the past couple of years, I've taken a greater interest in reading Christian biographies. I've come to think of these individuals as our 21st Century "Cloud of Witnesses" (to borrow a concept from the Bible book of Hebrews, chapter 12, verse 2). Perhaps you too will find them encouraging, motivating, and worthy of emulation as I did. a Quotes from Our 21st Century Cloud of Witnesses: a As a 15 year old (and for the rest of his life), Hudson Taylor maintained "the habits of prayer and Bible study in which he had been trained from childhood" (p. 63, in Hudson Taylor in Early Years: Growth of a Soul by Howard Taylor, OMF International, 1911).
"Daily reading the Bible is the most stabilizing habit in my life" (Ben Peterson, p. 27, in Road to Glory: The 1972 Olympic Journey of Ben and John Peterson by Ben Peterson, Camp of Champs Publications, 2015).
Source: https://samaritanministries.org/blog/wrestling-experiences-prepared-petersons-for-ministry

&q…

Threat to Tax-Exempt Status? Using Facilities for Profit

Question:

Can a church member conduct piano lessons in her church's auditorium without threatening the loss of the congregation's tax-exempt status?

Answer:

Our answer comes from Matthew Davis, J.D., former attorney with the nationally recognized Christian Law Association, who currently practices law in Wisconsin, Illinois, and Florida.

"As a tax-exempt entity, churches must be careful not only in what activities they engage in directly, but also in how they allow the facilities to be used.

"The primary way in which this can come up relates to the requirement for tax-exempt status that the ministry's activities must relate to its exempt purpose. Assuming the church's exempt purposes are 'religious, charitable, and educational,' (three of the purposes specifically mentioned in the Internal Revenue Code 501(c)(3)), piano lessons would certainly fit within that expectation as 'educational' and therefore not be a problem on the tax-exempt purpose i…

Disbursing Designated Gifts to Short-Term Missionaries

Question:

A church is sending a married couple on an unpaid short-term missions trip overseas. The congregation has expressed interest in supporting them during their trip. What is the best method to support this couple?

Answer:

Let us offer two options for consideration.

First, the congregation gives directly to the church and designates that the amount goes toward the couple's mission trip. Over time, this fund would accumulate and then be given to the couple before leaving for their trip. This method would require preparation and filing of a Form 1099-MISC at the end of the year.

The second option to consider is likely the better of the two. While the couple is on their mission trip, they will submit records of their expenses to the church and be reimbursed for that amount out of the same fund that is designated for them - likely a "Special Projects-Missions Fund" of some sort. Unlike the first method mentioned, this would not require a filing of Form 1099-MISC if 100%…

Pastor's Social Security and Medicare Tax Assistance: Why is it Taxable?

Question:

A treasurer recently asked:
"I recently became the treasurer for our local church and am trying to nail down what I need to include as income for our pastor's Form W-2. I was told that income includes weekly salary, monetary gifts, and half of the quarterly taxes that we pay directly to him. The first two items I get, but why would we include the quarterly taxes (and only half that amount) as income?"   

Answer:

In order to answer a question like this, it is important to understand the difference between a Federal Insurance Contributions Act (FICA) church employee and a Self-Employed Contributions Act (SECA) church employee.

FICA employees have 7.65% withheld from each of their paychecks to contribute towards Social Security and Medicare. Their employers contribute an additional 7.65% to total the 15.3% tax due for FICA employees. Examples of FICA church employees include: administrative assistants, janitorial staff, and any other non-minister workers.

SECA e…

"Erroneous" Form 1099-MISC Issued to Missionaries

Question:

A missionary receives a Form 1099-MISC from a church for which he provided no direct services during the year. His mission agency issues him a Form W-2 or Form 1099-MISC for his full missions support. Is the Form 1099-MISC income reported by the church also taxable?
Answer:
It is apparent that the church in the question above distributed money to the missionary, otherwise no Form 1099-MISC would have been issued. There are three likely explanations for a situation of this nature:

The first possibility takes place when the missionary receives income from a supporting church which is remitted directly to his mission agency. The agency will then report the income to the missionary on a Form W-2 or Form 1099-MISC.

The second possibility is similar to the first, except the missionary is the one who receives the money, not the mission agency. However, the missionary does report the income to the agency which will, in turn, report the earnings to him or her on Form W-2 or Form 1099-…

Designated Gift to a Missionary

Question:

A church recently held an ordination service for one of its members who is planning to go on a foreign missions trip. During the service, a $1,000 special offering was taken. Is this offering taxable to the missionary? Is it deductible by the donors?

After the offering has been given to the missionary, a friend gives another gift to the church. This gift is designated for the missionary, but "to be used as the church sees fit if the trip is fully funded." Can the church simply give this money to the missionary? And is this also deductible by the donor?

Answer:

In answering the first part, yes, the offering is taxable as compensation. Essentially, the church is "hiring" the missionary to help accomplish its own Great Commission mission. Because the missionary is "self-employed" for income tax purposes, the church should issue Form 1099-MISC, and the missionary should closely track and report business expenses to facilitate deductibility of those e…

Gifts in Kind to Ministries: Where are They Reported on Financial Statements?

Question:

How should a church properly report Gifts in Kind on its financial statements? Are they included on an income and expense report or only on a donor's contribution statement?

These gifts could be intangible--for example, free-rent facilities from a landlord or services from a professional--or tangible--for example, a vehicle.

Answer:

Most churches do not record these gifts in their general ledgers for inclusion on their financial statements. Only churches undergoing independent Certified Public Accountant financial audits would typically consider reporting these amounts and then only if they are material.

According to FASB No. 116 (Page 4), "contributions of services shall be recognized if the services received (a) create or enhance non-financial assets or (b) require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation."

Regarding donor acknowledgement, the church should not…

Clergy Housing Allowance Survives Attack (For Now)

The relentless efforts of a Wisconsin family to pass judgment on the clergy housing allowance were again stalled by the 7th U.S. Circuit Court of Appeals in Chicago in a decision announced Friday, March 15, 2019. The Court reversed the decision of a lower court in Gaylor et al v. U.S. Treasury which ruled that the clergy housing allowance was unconstitutional.

Had the original decision stood, ministers in the states of Illinois, Indiana and Wisconsin would have lost the exemption from income taxation for church compensation designated to provide for clergy housing costs. As has been the case since the early days of social security, a clergy housing allowance remains subject to the 15.3 percent self-employment tax. We believe that the loss of the exemption to ministers within the 7th circuit would have quickly spread to all U.S. clergy.

As advisors to many ministers, MinistryCPA expressed concern not only with the financial and public policy attacks against religious ministries, but with…

Church and NPOs’ Employee Contributions by Payroll Deduction (Part 2)

Question: 

A pastor approaches a church treasurer and requests that money be withheld from his paycheck for his tithe. How should a ministry handle this request?

Answer:

There are two ways to look at this.

The first way involves directly reducing the pastor's taxable income. Although this may be considered a "great" tax planning move by some, it is possible this choice will run into trouble with the IRS. From a statutory perspective, the IRS would likely invoke the constructive receipt doctrine which states, in effect, that income you earn and are offered cannot be turned away simply for purposes of tax avoidance (IRS Publication 525).

Under these circumstances, the IRS would likely choose to add the income to the pastor's Form W-2 and tax it accordingly. The IRS would then permit him an itemized deduction; however, that may not turn out to be helpful if he chooses to take the standard deduction.

On the other hand, if the pastor is simply asking for it to be withheld s…

Church and NPOs’ Employee Contributions by Payroll Deduction (Part 1)

Question:

A church treasurer asks, “Is tithing from payroll legally acceptable? And, if yes, how can I set it up through QuickBooks?”




Answer:
Many church and not-for-profit organizations find that their own staff members are among their most faithful donors! And, yes, it’s actually a good option for some employees. Of course, the same confidentiality and fidelity that oversees the charitable gifts of others to the employer must be exercised on behalf of staff members.
In QuickBooks (Desktop version), set up a new payroll item and follow the sequence presented below.


Give the deduction a name. The church or NPO could even set up multiple payroll items if some employees wanted to make designated gifts other than unrestricted contributions.

Keep working through the sequence of intuitive QuickBooks windows until you reach the following setup window. None of the options here should be checked.

Next… AND VERY CRITICAL to calculate on net pay.


The final window enables the employer to set up default …

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:

Payments from one 501(c)(3) organization to another 501(c)(3) organization are not subject to Form 1099-MISC reporting. The IRS 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 missionaries

Church Purchase of Materials Added to a Minister's Personal Library

Question:

A ministry offers an allowance on books and other study aides to assist its pastor in his teaching and preaching. If the pastor maintains ownership of these materials rather than the church, do these amounts become taxable to him as additional compensation?

Answer:

We believe that as long as the books and other similar supplies are related to his ministry rather than for his personal recreation, they are not taxable and he may maintain ownership without tax consequences. Presumably he and the congregation have gained the ministry benefit for which they were purchased. On the other hand, if he were to purchase books for recreation purposes (i.e., hobbies such as hunting, exercising, etc.), we would advise him to not use the church's reimbursement account. 

It is important to understand the presumption that the ministry-related books are expendable supplies incurred in support of employee activity and have negligible or reduced value in used condition. Additionally, it is imp…

Pastors Hit by New Tax Law: Wait—Maybe Not So Much!

Question:

A pastor no longer gets a benefit from writing off his unreimbursed ministry expenses. True?

Answer:

NOT TRUE! The most valuable tax benefit for pastors who don’t get fully reimbursed for their ministry expenses by their church or Christian ministry IS STILL AVAILABLE.
TRUE … The Tax Cuts and Jobs Act (TCJA) enacted in December 2017 jettisoned the itemized deduction for unreimbursed employee business expenses. But, based on our experience serving more than 100 ministers, missionaries and ministry workers annually, the TCJA did not take away the most valuable tax benefit of writing off unreimbursed ministry expenses.
Ministers are considered “dual status employees.” This means, among other factors, that most pay their own social security and Medicare taxes—a tax rate of 15.3%. Non-minister employees typically have only 7.65% withheld from their paychecks, while another 7.65% is contributed by their employers.
As we suspected when the TCJA was enacted, and now confirmed in 2018…

Form 1099-MISC Failure to File Penalties Update For Churches and Christian Ministries

Question:

What are the consequences for a church or Christian ministry failing to file a required Form 1099-MISC?
Answer:
An organization that fails to file a Form 1099-MISC as required by the IRS and cannot show reasonable cause may be subject to severe financial penalties, as outlined in the IRS instructions (Section O. Penalties) for the form: $50 per information return if you correctly file within 30 days; maximum penalty $547,000 per year ($191,000 for small businesses)$100 per information return if you file correctly more than 30 days after the due date but by August 1; maximum penalty $1,641,000 per year ($547,000 for small businesses)$270 per information return if you file after August 1 or you do not file required information returns; maximum penalty $3,282,500 per year ($1,094,000 for small businesses)Based on these penalties, churches should be mindful of the filing requirements. 
The most common expenditures that churches make subject to Form 1099-MISC …

Pastor's Mid-year Resignation Effect on his Annual Housing Allowance

Question:
Every December, a church designates its pastor's next year's housing allowance. Its pastor resigned during the year to pursue other employment. How should his annual designated housing allowance be assigned to part-year compensation?
Answer:
To our knowledge, there is no specific guidance available in IRS regulations or rulings or in court case records to authoritatively clarify this reporting. It seems appropriate, however, that the annual housing allowance should simply be prorated over the time he was employed by the church. This situation does demonstrate the potential wisdom of documenting housing allowance as a monthly amount since mid-year turnover in the office of a pastor is not an uncommon event.
A pastor contemplating an earlier departure may wish to declare (or request) in advance that his housing allowance be increased immediately for the remainder of his service.
The minister's church or other qualified organization must designate the house allowance pur…