MinistryCPA - Corey A. Pfaffe, CPA, LLC

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 cite...

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 individ...

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). "A simple layman armed with Scripture is to be believed above a pope or a ...

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...

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-MI...

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 ot...