MinistryCPA - Corey A. Pfaffe, CPA, LLC

Question: A missionary is doing mission work for less than one year away from his tax home.  1.) Is he considered to be on a business trip the whole duration of the trip? 2.) What deductions is he able to take? 3.) May a self-employed person use the standard meal allowance? Answer: In this situation, the missionary is considered to be on a business trip/temporary assignment according in to IRS Publication 463 . On page 4 the publication states, “Generally, a temporary assignment in a single location is one that is realistically expected to last (and does in fact last) for 1 year or less."  One must then consider what expenses are allowable as deductions for a temporary assignment. Pub 463 states, “You can deduct ordinary and necessary expenses you have when you travel away from home on business. The type of expense you can deduct depends on the facts and your circumstances.” Table 1-1 in the publication provides a quick summary of deductible business expens...

Question:   Do churches use the same form of accounting as ministry organizations? Answer: Yes. Both a church and a ministry that follow Generally Accepted Accounting Principles use the same form of accounting – full accrual. But smaller churches tend to use a form of accounting such as the modified cash basis of accounting. Full accrual is governed by the rules set in place by the FASB (Financial Accounting Standards Board). FASB  116 and 117 are specific statements that discuss the application of full accrual accounting to a not for profit organization. Resources regarding this topic: We have a brief PPT linked on our website with a short comparison among the general three types of accounting. Presentation: Church and Christian Ministry Church Financial Management -  http://www.ministrycpa.com/?q=alldownloads Other possible resources may be explored on the website sponsored by Church Law & Tax Report   htt...

Question: When a church solicits special offerings for visiting guest speakers is the income taxable to the guest speakers, and are the contributions tax deductible by the donors?        Answer: According to  IRS Minister Audit Technique Guide , “Contributions made to or for the support of individual missionaries to further the objectives of their missions are includible in gross income (Rev. Rul. 68-67, 1968-1 C.B. 38)”  (p. 6 of PDF) . The offerings solicited for visiting guest speakers represent compensation for the services rendered. The offering income is taxable to the recipients. The guest speakers may be able reduce this income by business related expenses, but the offering must originally be included as income. Although the income is taxable that does not automatically indicate that the offering will cause a tax deduction for the donors. The deductibility lies in the control of the monies and purpose of the organizat...

Question:   Some financial advisors have communicated that Internal Revenue Code Section 403(b) retirement plans sold by them are “uniquely able to provide tax-free withdrawals (as housing allowance) upon retirement for clergy.” Is tax-free treatment only available through specialized financial advisors selling 403(b) plans? Answer: IRC Section 403(b) plans are designed for tax exempt entities that wish to enjoy the benefits offered to businesses by similarly provisioned IRC 401(k) plans. When adopted by churches as their employee benefit plans, they are eligible for significant advantages to ministers including potential tax-free treatment upon retirement. This is true regardless of the investment plan administrator. Churches may contact investment advisors in their communities to determine whether they also can assist in establishing 403(b) plans.  Please follow these links to past posts concerning this topic: http://ministrycpa.blogspot.com/2009/10/ret...

Question: Does the installation of an in-ground pool qualify as a housing allowance expense? Answer:   A minister’s housing allowance benefit is non-taxable income to the extent that the allowance is used for housing expenses. The three-part test includes consideration of the fair rental value of the home, plus actual costs of utilities (see this  blog post  regarding the three-part test). In addition, the expenses must be incurred relative to the minister’s principal residence. According to Federal Tax Regulations, Regulation, §1.107-1, Internal Revenue Service, Rental Value of Parsonages, only food and servants are specifically excluded. To our knowledge no court case, Revenue Ruling, or Private Letter Ruling has addressed in-ground pools. :) However, the expenditure, if meeting the above general guidelines, appears to meet the requirements. Nevertheless, we find that large expenditures such as the installation of a new in-ground pool often...

Question: A church employee was ordained as a minister mid-year. While a non-ministerial employee, the church withheld FICA taxes from the employee and paid the employer portion. Now that the employee is a minister, he will be paying his own Self-Employment (SECA) taxes. Should the Form W-2 at the end of the year reflect $0 in boxes 3 and 5, Social Security and Medicare earnings respectively, or should the church report the SS and Medicare wages earned while the individual was a non-ministerial employee? Answer: In box 3—Social security wages, the preparer of the Form W-2 should show the wages subject to the social security tax. In box 5—Medicare wages and tips, the Form W-2 should show the wages subject to the Medicare tax. In this case, the amounts in boxes 3 and 5 will only be the wages earned when the employee was classified as non-ministerial.

Question : My daughter is in college. I heard that Form 1098-T for 2016 may report college tuition differently. Is this true? Answer : The IRS has released the new 1098-T with several changes for 2016. According to the 2016 IRS instructions, institutions may no longer report the amounts billed for qualified tuition and related expenses, previously shown in box 2 of form 1098-T. Public Law 114-113, Division Q, section 212, now requires institutions to report only the amounts actually paid for qualified tuition. Additionally, a new box has been added to the Student’s taxpayer identification box. According to the IRS, this box must be checked by the issuing educational institution “under penalty of perjury that you have complied with the standards promulgated by the secretary for obtaining the student’s TIN.” The PATH Act of 2015 included this required change for 1098-T reporting. ***Update: The IRS issued Announcement 2016-17 on April 27, 2016, providing a limited penalty r...

WWNTBM* is a missions agency serving over 100 missionaries in more than 80 locations world wide. It seeks to assist its missionaries in every way possible. One of the ways it does that is to offer multiple banking options, in order to best meet missionaries’ individual needs. We at MinistryCPA have asked one of WWNTBM’s representatives to share the following information with our readers. Did you know that there are many ways a missionary can receive his support other than receiving a check in the mail? Technology has so progressed in this area that we no longer have to go to the bank daily to stand in line waiting to make deposits or send money. We can send funds all over the world right from our computer. It is so much faster and more efficient. Some of the ways we at WWNTBM are able to assist our missionaries with their banking needs are described below. ✦   International Wire The missionary chooses a bank in his country and we wire direc...

Question: Sue—“I’m planning on issuing my pastor a 1099-MISC for this year and I understand that I can't include Housing Allowance, but what about the retirement that church paid monthly on behalf of my pastor? And the mileage reimbursement we've paid him? Do I have to report all these on 1099?” Answer: Sorry, but it’s a bad idea all around. Unless your pastor is an itinerant pastor serving multiple congregations, it’s virtually impossible to classify him as an independent contractor for whom a Form 1099-MISC is prepared. Further, if the church provided him a retirement plan, then that settles it right there. There is no church retirement plan in the Internal Revenue Code for independent contractors. Pastors receive Form W-2. Housing Allowances are noted in the memo box – Box 14. And the retirement plan reporting depends on the type of plan. Mileage reimbursement? it depends on whether it’s an accountable or a non-accountable plan. Sorry to say this, but Sue likely needs pr...

**Update to Previous Blog Post : Proposed Change for Donor Written Acknowledgements Yesterday, January 7, 2016, the IRS withdrew its proposed rulemaking change for donor written acknowledgements. Per REG-138344-13 , the IRS received public comments that “expressed significant concerns about donee organizations collecting and maintaining taxpayer identification numbers for purposes of the specific-use information return.” As a reminder though, nonprofits are still required under IRC Section 170(f)(8) to provide donors a written acknowledgement for any gift over $250. Check out our blog’s other discussions on charitable contributions.