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Advantages for a Church to Pursue Formal Recognition of IRC Section 501(c)(3) Status

Question:

Our church is looking to apply for 501(c)(3) status. What are the advantages and disadvantages of pursuing formal recognition as a 501(c)(3) organization?

Answer:

To be tax-exempt under Internal Revenue Code § 501(c)(3), organizations (e.g., churches) must be organized and operated exclusively for exempt purposes set forth in the IRC. Additionally, a 501(c)(3) organization must not be organized or operated for the benefit of private interests (referred to as "private inurement").

Churches are automatically classified as IRC § 501(c)(3) entities regardless whether they have been formally recognized by the IRS. Yet, there are reasons to pursue formal recognition. Those that do receive this recognition receive from the IRS a Tax Determination Letter.

Advantages:

1. Church schools that wish to apply for grants will likely need to provide a Tax Determination Letter since foundations do not want to disseminate funds only to find that they were contributed to disqualified c…

Summary of the Families First Coronavirus Response Act

The “Families First Act” requires virtually all small employers to extend sick leave to affected employees, but a tax credit will help small business and not-for-profit organization employers pay for it.
Following are the most critical provisions, we believe, for small employers:
·    1. Public Health Emergency Leave (Division C of the Act effective April 2, 2020) – Small employers who have “employees who are unable to work (including telework) due to a need to care for a child under age 18 if school or child care is unavailable due to a public health emergency” are required to: oProvide paid leave “if needed by any employee who has been employed at least 30 calendar days,” oPay them “at a rate no less than two-thirds of the regular rate of pay” for public health emergencies declared by a federal, state or local authority that extend beyond 10 days (“employees may be required to use existing accrued leave during the first 10 days”). ·      2. Paid Sick Leave (Division E of the Act effective…

Top 10 Questions that Pastors Ask MinistryCPA: Q7 - Can a Pastor Receive a Tax-Free Gift?

Question:

Can a church give non-taxable gifts to its pastor(s)?

Answer:

Typically, there are two ways members of a congregation can give gifts to its pastor(s) and staff member(s). One involves corporate action and the other involves personal and individual action.

1. The church can take up a collection for its pastor(s). In this case, the contributions are deductible to the donors, but must be reported by the pastor since they are deemed payments received from an employer as compensation for his services. Any gifts paid by employers to their employees are considered taxable income and must be reported together with other earnings on Forms 941 and W-2.

Additionally, churches should be aware of the Internal Revenue Service's "De Minimis Fringe Benefits" rules. According to IRS Publication 15-B, a de mininis benefit is any property or service provided to an employee that has so little value that accounting for it would be unreasonable or impractical. However, cash and cash …

Advancing Your Not-For-Profit Expertise

Question:

I am now committed to a not-for-profit career and finding it very fulfilling. What can I do to better qualify myself?

Answer:

We like what we are seeing in the new Master of Nonprofit Administration offered by Maranatha Baptist University.
What we like about it:
       1.We have personal knowledge of the faculty members' experience in the not-for-profit world.        2.The featured courses hit on the areas we have found not-for-profit leaders hungry for advanced             training. ·Writing grant applications that appeal to foundations looking for partners ·Recruiting, selecting, and supporting quality volunteers        3.Of course, as CPAs, we like the emphasis on wise and conscientious financial stewardship!        4.With the plethora of regulations and legal hazards, we can see that not-for-profit leaders will be          equipped with a solid introduction to legal and regulatory issues.
To find out more, we encourage you to visit Maranatha’s website or contact the Univers…

Stewarding Your Church Benevolence Fund

Question:
How should a church handle benevolent giving and what principles should be followed?

Answer:
Many churches have established a “benevolent” or “others” fund to help meet the special financial needs of its members and community. All members of the congregation are generally encouraged to give to the fund to allow the church to respond through an authorization process observed by church officers. While a fund like this can be of great assistance to individuals in need, there are some principles a church can follow to be wise with these funds and to comply with the Internal Revenue Code.
1. A benevolent gift is not disbursed in exchange for goods or services rendered. Therefore, it is not considered taxable income to the recipient, and no reporting (e.g. Form 1099) is required by the church. A gift of benevolence is a gift with absolutely no expectation of repayment or receipt of services. There may be instances when those in need may ask for a loan rather than a benevolent gift.…

Top 10 Questions that Pastors Ask MinistryCPA: Q6 - What do we do about rising health care costs?

Question:

What ideas can a church consider to control its rising health care costs?

Answer:

Many ministers and their employers are looking for alternative plans to control rising health care costs without neglecting those in need of medical services. Because of the Affordable Care Act (ACA) requirements, many churches have reconsidered the medical benefits it offers to employees. If the church employs a single employee—a solo minister, the ACA has one set of requirements. Generally, there is more flexibility when there is only one employee. But for churches with two or more employees who participate in medical benefits, the ACA has stringent requirements.

We suggest that you consult your tax professional when offering medical benefits. The benefits the church offers may very well be 100 percent taxable to the employee.

For example, be aware that if a church covers the monthly share costs of an employee for a health-sharing plan (e.g., Samaritan Ministries International, Medi-Share, or …

Top 10 Questions that Pastors Ask MinistryCPA: Q5 - What Reports are the IRS Looking For?

Question:

What reports do churches need to file with the IRS regarding pastors' compensation?


Answer:

Other than for the pastor, a church files the same reports for all employees and is subject to the same withholding rules for standard employees as any other organization. Ministers compensation, however, is exempt from all withholding. The only exemptions churches enjoy compared to other organizations are (1) an exemption from unemployment taxes, and (2) an exemption from FICA (Social Security and Medicare) tax for churches that file Form 8274IRS Publication 15 can answer church treasurers’ standard questions regarding church payroll.

Reporting a minster’s compensation is often confusing even to treasurers who are familiar with the rules for standard employees. The following is a sample compensation arrangement:


Don’t Use a Tax PREPARER and Don’t DIY Online -- Use a Tax PROFESSIONAL

Your financial stewardship is too important to trust to a tax preparer (someone who only fills out tax forms) or a do-it-yourself tax software.

A true tax professional views the preparation of your tax returns as a final, relatively simple step. Well before that time the professional serves you with forward-thinking strategies for your financial health. This is true whether you are a year-after-year Form W-2 employee earner or a business owner in an ever-changing financial landscape.
Families whose primary sources of income are reported as Form W-2 wages have both before and after year-end tax opportunities that tax pros use to serve their clients and to offer services that more than pay for themselves.

Examples: Planning ahead: Your tax professional simply reminds you that your daughter will turn 17 next year—that’s typically a $1,500 hit to your wallet. BUT when your tax pro asks and then understands that she is also starting her college education next fall, your advisor reminds you …

Top 10 Questions that Pastors Ask MinistryCPA: Q4 - Should the Pastor Have a Car Allowance?

Question:

Should a church set up a car allowance for its pastor?

Answer:

Any financial assistance that a minster’s employer can give is appreciated. A car allowance can be especially helpful. Car allowances, however, must be established as “accountable plans.” This means that any advances given by the employer to the minster must be properly substantiated on a timely basis or the Internal Revenue Service requires the minster to refund the unspent, undocumented portion of the allowance.

It’s a better idea to offer a professional expense reimbursement under accountable plan rules of the IRS, instead of a car allowance. A reimbursement arrangement covers car expenses, plus other professional expenses. Documentation can then include non-auto costs such as air, travel, lodging, conferences, gifts, books, supplies, and any other legitimate ministry-related expenditure.

The minister documents car expenses when he provides a record of the date, business purpose, and number of miles for each tr…

Accountable vs. Nonaccountable Professional Expense Reimbursement Plans

Question:

What is the difference between an accountable and nonaccountable professional expense reimbursement plan? If a pastor's church advances him more than his actual expenses, can he keep the excess and simply report it as additional taxable income?

Answer:

Some churches have set up professional expense reimbursement plans for their pastors that are not in compliance with the Internal Revenue Code. For example, a church includes $100 per month in its budget to advance to the pastor for his ministry expenses. The church requires no substantiation, but assumes the pastor has at least that much in unreimbursed expenses. Therefore, the church does not report theses advances as taxable income. This procedure is incorrect.

Most pastors understand their duty to use these funds for church purposes. Some believe if they do not incur sufficient tax deductible expenses, they are permitted to report the excess advances as taxable income and use the undocumented monies for personal purpose…

Top 10 Questions that Pastors Ask MinistryCPA: Q3 - What's the Best Retirement Plan?

Question:

As a pastor, what are my retirement options and what are the advantages/disadvantages of each?
Answer:
The best retirement plan option for each minister depends on his objectives and his current tax situation. The three most common retirement plan options used by ministers include:
(a) Internal Revenue Code 403(b) plans (also called Tax Sheltered Annuities (TSAs)) (b) Traditional Individual Retirement Accounts (IRAs), and (c) Roth IRAs 
Ministers often select 403(b) plans when they want to maximize their eligible contributions, or to reduce their self-employment tax burden. For the year 2020, a minister may elect to have his employer withhold (“elective deferral”) up to $19,500 of his compensation and contribute it; instead, to his 403(b) qualified investment account. Ministers who are 50 and older are eligible to increase this amount by another $6,500 to catch-up for earlier years’ smaller deferrals (IRS Publication 571).
In addition, unlike other retirement plan choices, an…

Top 10 Questions that Pastors Ask MinistryCPA: Q2 - What Counts as a Housing Allowance?

Question:

As a pastor, what can I deduct for a housing (parsonage) allowance?

Answer:

A minister who receives a housing allowance may exclude the allowance from gross income to the extent it is used to pay expenses in providing a home. A minister living in a parsonage qualifies for a housing allowance to the extent of his own out-of-pocket costs. The IRS lists only food and servants as prohibitions to allowable housing expenses.

The minister’s church or other qualified organization (e.g. religious school or college with board members accountable to local churches) must designate the housing allowance by official action taken in advance of the payment. If none of the minister's salary has been officially designated as housing allowance, the full salary must be included in gross income. 

If a minister owns a home, the amount excluded from the minister’s gross income as a housing allowance is limited to the least of the following three amounts: (a) the amount actually used to provide a…

Important Changes for Seniors and Their IRA Retirement Options

On December 20, 2019 President Trump signed the SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019). Effective January 1, 2020, two widely applicable changes to Individual Retirement Accounts (IRAs) have been made:

1)Seniors turning 70½ in 2020, can now wait until the year they turn 72 years old before being forced to take taxable money out of their IRA and other retirement investments. These are called RMDs (Required Minimum Distributions). 2)Beginning in 2020, seniors can continue to make deductible contributions to their IRA accounts as long as they’re still working and receiving earned income. Before 2020, taxpayer who turned 70½ lost their right to deduct contributions to IRAs even though they were still working.


Top 10 Questions that Pastors Ask MinistryCPA: Q1 - Employee or Self-Employed?

Question: 

As a pastor, am I an employee of the church or am I self-employed?

Answer:

The answer is "yes" to both. Most ministers are considered employees in every respect except for the purposes of paying self-employment tax (SECA), which includes Medicare and Social Security tax. This means that they are eligible for virtually all employee benefits that are given favorable tax treatment in the Internal Revenue Code. Many of these benefits are unavailable to the typical self-employed individual.

Ministers are not permitted to have employee Social Security and Medicare (FICA) withheld and matched by the church. Ministers who have not been granted exemption from SECA tax must pay the entire 15.3% of self-employment tax. Many churches provide additional funds to assist their ministers in the payment of this tax, but this additional compensation, while very helpful, is subject to both income and self-employment tax.

Itinerant evangelists are a common example of ministers who do …