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Missionary Training--Tax on Travel Reimbursement

Question: A church member wishes to become a missionary, and will spend the next six months training out of state. His church wants to pay for both his training and his living expenses (e.g., food, travel expenses, etc.) during that time so he can stay fully committed to his training. Is this support considered taxable income?Answer:In this situation, the individual in training is considered either an employee or an independent contractor of the church because he is being compensated for helping the church fulfill one of its responsibilities, the Great Commission. It may turn out, though, that he will end up with little taxable income.In determining whether the expenses paid by the church are considered taxable income, it is important to identify whether the individual's assignment is temporary or indefinite. The IRS provides a couple key indicators in determining the correct assignment. The first indicator considers the amount of time spent away from one's main place of work. …

Unsolicited Church Contributions Designated to Missionary

Question: A church supports a missionary with a generous monthly disbursement to his mission agency. This regular monthly amount is disbursed from its general fund as a budgeted expenditure. A donor has made a contribution earmarking the same missionary with a designated gift. The church has not solicited or maintained a designated fund for this missionary. What alternatives might the church consider to handle the contribution?Answer: A church may apply one of two alternative policies to handle unsolicited designated contributions. 1.) While every missionary family could certainly put additional funds to good use, the first alternative implies the assumption that the current monthly amount from the church provides a very minimal or insufficient amount to support his or her work. Hence, additional support enabled by designated gifts will be most welcome, encouraged, and solicited. Because the designated gifts are above and beyond the budgeted amount, a separate designated fund must be cr…

Treatment of Funds Raised for Cancelled Missions Trip

Question: Church members were planning to participate in a church-sponsored mission trip, and the participants have raised funds from various donors. Unfortunately, due to COVID-19 the trip was cancelled, and the church disbursed to the participants the funds that had been raised. Should a Form 1099 be filed for any amount refunded in excess of $600?Answer:
While the COVID-19 pandemic may be a rare occurrence, it is not uncommon for individual members to find it necessary to cancel their participation. When members cancel their participation for any reason, including the scenario described above, there are two ways we recommend the church handle the funds raised for the mission trip. The first is that the funds be returned to the original donors. Because the donors had provided their gifts for specific individuals to attend the trip, which is no longer taking place, the funds could be refunded to the donors. The second option is to place the monies in a designated fund for future missi…

May a Benevolent (Non-Taxable) Gift Be Given to a Guest Speaker?

Question: 

A church had a guest speaker fill the pulpit twice during the span of the year. For those two times, the speaker received a total of $1,000 in honorarium ($500 per Sunday). The church issued him a Form 1099-NEC for that amount. 
However, during the course of the year the speaker and his wife encountered substantial hardship. Is it permissible that the church choose to offer assistance to the speaker from its benevolent fund? Will a gift of this nature be taxable income to him?
Answer:

To determine whether the gift is considered taxable income in this case, let's consider the following.
1) The nature of the gift.     The nature of the gift should be entirely benevolent. If the gift is given to supplement the less than fair value amount paid to the speaker for his services, or with the expectation he will speak again in the future, the gift is considered income and is taxable to the individual. Benevolent disbursements are not considered taxable income to the recipient as long …

Treatment of Online Giving and Processing Fees

Question: How should a church record online donations in the following situations? Additionally, what amount is the donor allowed to deduct as a charitable contribution?1.) The processing fee is deducted from the donor's gift. 2.) The donor pays the additional processing fee.  Answer:1.) The processing fee is deducted from the donor's gift.    For example, an individual gives $100 to the church and the payment processing company charges a $3 processing fee. The church will receive the net amount of $97. We recommend that the church record the full amount of the gift, $100. The church will then record an expense to account for the $3 processing fee. The donor receipt will reflect the gross amount ($100), which is the amount deductible to the donor as a charitable contribution.2.) The donor pays the additional processing fee.              In this case, the donor donates $100 to the church and pays the $3 processing fee. The church should simply record the $100 donation in this s…

Posting designated gift contributions to equity accounts

Question: 
Why is it best to credit donor designated contributions to Designated Fund Equity accounts rather than Income accounts, as you propose in your recent post? ("Debits and Credits for Designated Gifts")

Answer: 

In most cases, the Income accounts in QuickBooks relate to the receipt of General Fund contributions. At the end of each fiscal year, those Income accounts close into the balance sheet General Fund account. The same process is followed regarding General Fund expenses.

The effect of posting designated gifts and disbursements to Income and Expense accounts which are closed into the General fund balance combines them with all other financial transactions thus zeroing out any remaining unexpended designated gift amounts.

Some ministries have avoided this by keeping a second set of records, which is unnecessary in our opinion. A charitable organization will naturally want to maintain its Designated Fund balances which will carry over from one year to the next when p…

QuickBooks Classes for Church Ministries

Question: 
A not-for-profit organization wants to establish two ministries with similar but independent operations, for example, a men’s ministry and a women’s ministry. It wishes to prepare and implement a budget for each ministry and wants the ability to create reports for each ministry. Ultimately, it wants any excess or deficiency of receipts compared to disbursements for a given year to be “remembered” as the ministry continues year upon year.

Additionally, donors are occasionally solicited to contribute to short-term special projects with the promise that their donations will be spent only for that temporary project. For example, perhaps the women's ministry wishes to received designated contributions toward a one-time equipment purchase.

How might an organization accomplish these multiple objectives: 1) tracking men's and women's ministry general fund balances year-on-year, and 2) tracking special projects' receipts and disbursements? 
Answer:

Before addressing th…

QuickBooks Reports of Designated Fund Activity

Question:The following question rolls out of content provided in a previous post: "Debits and Credits for Designated Gifts."How do I generate a report in QuickBooks that shows the monthly starting balance, change for the month, and the ending balance for each Equity account relating to Designated Gifts? Answer:Our answer here will be consistent with the above cited blog post. In it we discussed simplest approach to handling Designated Funds that we can suggest. We will illustrate assuming the use ofQuickBooks Desktop. Some of these instructions may be slightly modified for users of QuickBooks Online.The following are the necessary steps:1. Select the "Reports" pull-down menu 2. Under "Accountant & Taxes" choose "Trial Balance" 3. Modify the date range to reflect the desired period 4. Double-click on the amount for the Equity account of interest This will generate a "Transactions by Account" report.

Mullen's Dairy Bar - A Business, a Pandemic and the Journey

On March 23, 2020, a governmental order was given to close all “non-essential” businesses due to the coronavirus outbreak.These words fell heavy upon the community and left the hearts and minds of every business owner questioning who was considered essential and what does an essential business look like during a pandemic?

Mullen’s Dairy Bar, in Watertown, Wisconsin was such a business.We asked Adam Keepman, operator and chef of Mullen’s, to share his journey with us and how Mullen’s has changed through COVID-19.

As we spoke with Adam over lunch, he looked pleasantly comfortable with all the busyness surrounding us. Our first question addressed the “most challenging obstacle” during the pandemic. “Was it customers, vendors or possibly finances?” we asked. His answer matched the initial reaction for many of us.“My biggest obstacle was myself, keeping cool, being positive and productive. I had to be able to look at the situation with a clear head. I also spoke with my staff, making sure ev…

Reflections on Small Business PPP Loans and Bank Relationships

Most of our small business clients are now focused on Step 2 of the Paycheck Protection Program (PPP) loan process - FORGIVENESS. While we're waiting yet again for clarifications from Congress and the Small Business Administration (SBA) on the rules for forgiveness, this may be a good time to reflect on small business banking relationships.
While national banks have received the most PPP loan attention from the popular press, we've been pleasantly surprised with the superior quality of our clients' experiences with smaller regional or state banks. There have even been a couple of credit unions that have participated in the SBA programs and aided our clients. Our clients have found these financial institutions almost without exception to be more responsive to small business needs than some of the national banks.
Don't get us wrong. We've also worked with individual bank professionals at these larger institutions who are serving well, so we don't want to name na…

Form 941 or 944 - Which Should a Church Use for Payroll Reporting?

Question:

Are churches required to file a Form 944 annually to report their employees' earnings and tax-withholdings? A quarterly Form 941 (rather than an annual Form 944) is required of some employers. Which IRS form, if any, should be filed?
Answer:

According to IRS Section 1402(c) and 3121(c), ministers are not subject to mandatory income tax withholding. Unless one or more ministerial employees request non-mandatory withholding, church employers with only ministerial employees do not need to file Form 941 or Form 944. The IRS Ministers Audit Techniques Guide explains in further detail a minister's treatments for Social Security, Medicare tax, and income tax withholding.

Form 941 or 944 must be filed when non-ministerial employees are compensated or when ministers request withholding.

When can a church file the annual Form 944 rather than filing Form 941 each quarter?
The IRS may permit the annual filing of Form 944 for employers who have less than $1,000 of withholding taxes to …

What should our church use to keep the books?

Question:

What bookkeeping system should our treasurer use to keep the church books?
Answer:

The bookkeeping system used by a church must be compatible with current and future treasurers’ training and experience. To adopt a system that is overly complex or suitable for only a highly qualified bookkeeper may create grave difficulty when there is turnover in the treasurer’s position. The following are several solutions that small local churches have found useful:

1. Accounting software. Intuit QuickBooks Desktop or Online and Sage (formerly Peachtree) are two general purpose accounting software packages. There are some church/ministry specific systems, such as Shelby Systems. These more specific software options tend to be more costly but also tend to have the features that the others do not. 
All these software options offer government reporting, payroll processing, donor management, bank reconciliation tools, use of bank feeds (downloading transactions), budgeting, and many others featu…

Should I opt out of Social Security?

Question:

Should I "opt out" of the Social Security system?

Answer:

First, some background information:

The Internal Revenue Code (IRC) exempts ministers from mandatory federal and state income tax and Medicare and Social Security (FICA) tax withholding by their employers. However, if they do not elect to have income tax withholding, then most ministers must file and pay federal and state estimated tax vouchers.

In any case, the employers of ministers are not permitted to withhold and match the 7.65 percent FICA tax. Instead, the minister (unless he opts out of the Social Security system) is responsible to pay the entire 15.3 percent self-employment tax (SECA). Many ministers elect to have additional federal income tax withheld so that the excess can be applied to their self-employment tax obligation at the time they file their annual Form 1040.

Now, let's consider what opting out of Social Security might mean:

1. A minister may apply to opt out of the Social Security sys…

Can the Church Sell the Parsonage and Give the Money to its Pastor?

Question:

How can the church and I work together to sell the parsonage and get my family into a home of our own?

Answer:

The answer varies greatly based on the church’s and minister’s specific situation. However, the following are several issues that likely need to be addressed.

      1. Any property transferred by the church to the minister will be considered taxable compensation at its fair market value (reduced by any payment by the minister to the church).
      2.Because the minister will no longer be living in real estate that is exempt from property taxes, his costs of living will increase accordingly.
      3. An excludable housing allowance is governed by a three-part test. Some ministers may believe that designating as housing allowance a one-time, large bonus from the church, which the pastor intends to use as a significant down payment, will fully qualify as exempt income under the three-part test. However, a large housing allowance designation may not fully eliminate the taxa…

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 char…

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…

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.…

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 …

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 …