Why record designated gifts to Equity instead of a Liability accounts?

Question:

Why wouldn't a contribution designated to a missionary be recorded as a Liability instead of an Equity Fund account as you suggest? Then when the money is sent to that missionary the entry would simply reduce the Liability account.

Answer:

Generally Accepted Accounting Principles (GAAP) states that donor designated gifts, including missions funds, are considered donor restricted funds. As restricted funds it is best practice to record designated gifts as equity accounts, which falls under GAAP standards. This is true regardless of whether the restriction is temporary or permanent. Temporarily restricted gifts are gifts given by the donor for a specific purpose or program or for use at a certain time. In a church, common temporarily restricted funds might include a missions fund, benevolence fund, building fund, and others. Permanently restricted contributions are gifts given by the donor to be permanently maintained, but the church may use any income that comes from the gift. For example, a member gives a substantial amount of cash hoping to maintain a benefit in perpetuity for missions' families. The donor mandates that the funds be invested and only earnings be used by the church to provide college scholarships to missionary children.

While it is not the best practice, if the congregation is comfortable viewing missionary collections and disbursements as debts (liabilities) the missions funds can be recorded as liabilities as long as no external party insists on a financial statement presentation in accordance with GAAP.

For more information on recording designated gifts, see...

Three QuickBooks Alternatives to Posting Designated Gifts

Debits and Credits for Designated Gifts

Posting Designated Gift Contributions to Equity Accounts

Comments

Rental of a Church Parsonage to a Non-Minister

Question: A church owns a parsonage, but the pastor does not use it as he owns his own home. The church rents the parsonage to a tenant other than a minister or employee of the church. Will the church be responsible for paying income tax on these monies as Unrelated Business Income (filing a Form 990-T) even if the money is used to carry on the business of the church? Answer: Whether the money is used for church purposes is irrelevant. IRS Publication 598 states: "If an exempt organization regularly carries on a trade or business not substantially related to its exempt purpose, except that it provides funds to carry out that purpose, the organization is subject to tax on its income from that unrelated trade or business." Fortunately, in the case of rental income from real property, such income is "excluded in computing unrelated business taxable income" (Publication 598). Caution: see content below regarding debt-financed property. However, a second concern not a...

How can my ministry expenses be covered by the church?

How can my ministry expenses be covered? Many ministers use their personal autos for ministry purposes. Their employers can reimburse these costs using a standard mileage rate published by the IRS. The per mile rate represents employees’ entire reimbursable cost other than highway tolls and parking tabs. If not covered by use of the ministries’ credit card, other costs can be reimbursed as well—business and travel meals, lodging, office supplies, and professional library purchases among them. Some ministries reimburse travel costs using per-diems published by the IRS. If employee business expenses are not reimbursed, the personal tax deduction benefit to the individual minister is severely limited. Non-taxable reimbursements after documentation is provided to the employer follows IRS rules for accountable plans. Non-taxable cash advances before expenses are in...

What is the best retirement account for a Minister?

What are my options for retirement savings? Regardless of options, start now! You probably have learned about traditional and Roth IRAs. We have often found them well short of the benefits we will share here regarding Internal Revenue Code section 403(b) plans. These plans must be established by your employer (although you might need to be the initiator). They are funded in two ways—withholding from your paycheck at your option (called “elective deferrals”) and as initiated by the employer (matching or non-elective contributions). These contributions not only save income tax, but they also reduce the income you must report as subject to the 15.3% SECA tax. Further, at retirement with the cooperation of your church or Christian ministry the distributions to you can be tax-free to the extent of your qualified housing expenses. Many ministries also adopt what are often called “FICA alternative” be...

MinistryCPA - Corey A. Pfaffe, CPA, LLC

Search This Blog