MinistryCPA - Corey A. Pfaffe, CPA, LLC

Question: I have a question concerning the taxability of a “love gift” given to a departing pastor after he has left the church. We have been told by our convention that if the church follows certain steps, a gift made after the minister’s final day of payment for services will not be taxable to the minister. The requirements include being voted on by the church, given after the minister’s final day of payment and completely voluntary on the part of the membership and including information in the churches minutes. Answer: The IRS "Minister Audit Technique Guide" available at the following link is particularly helpful in answering questions such as these: Minister Audit Technique Guide I cite here a few sections from the guide, but more information is available there--particularly in the section with the heading, "Gift or Compensation for Services." "There are numerous court cases that ruled the organized authorization of funds to be paid to a reti...

Question: Can a pastor's house payment and other expenses equal to his housing allowance be paid directly from the church bank account? Answer: Technically, the answer is yes. I know of no ministry that does this and I strongly recommend against it. Most church treasurers are busy enough without processing all the pastor's housing expenses. One check per pay period can be issued to the pastor to cover his cash compensation, plus his housing allowance. Question: If a pastor has opted out of social security does he have to show housing on the Form W-2? Answer: First, he does not need to show it on Form W-2 because it is the church that prepares the form, not the pastor. Regardless whether the pastor has opted out of social security, I strongly recommend that the church report the housing amount in Box 14 as a memo item. While it is not technically required, it reports to the pastor the amount that he must account for. Any excess designated amount above his actual...

Question: A pastor at a church is taking a 3-month sabbatical trip for "rest and renewal." The expenses for the trip are being paid by the church. Does the IRS require that these expenses be considered income to the pastor for Form W-2 purposes? Answer: IRS Publication 463 is helpful here. The taxation issue relates substantially to whether the trip is for "bona fide business (ministry) purposes" or for personal purposes. For example, a trip to visit ministries supported by a church for purposes of encouragement and accountability in the work of its people, and for the purpose of reporting back to the church are clearly business purposes. Another question implied by the Publication relates to whether a pastor "would otherwise be allowed to deduct the travel expenses" had he paid for the trip himself (as an employee of the church). More... "You can deduct all of your travel expenses if your trip was entirely business related. If your trip w...

Question: In response to your February 24, 2009, blog posting that suggests, "Unless a church wishes to report its financial results using full GAAP accounting, I recommend recording equipment purchases as expenses and omitting any depreciation concern," I am afraid the church will not have "formal control" over the assets nor a good record (or evidence) of its possession (other than the invoices) when unexpected events occur, say if it is stolen. Is it wise to ignore Generally Accepted Accounting Principles? Answer: You may wish to review the full blog posting, but the question allows me to address some important points. Each church should be able to identify the property it owns. Catastrophic events such as fire and vandalism do befall churches. It may be wise to video church property on a periodic basis for this very purpose. Of course, off-site storage of equipment lists will aid greatly in documenting a loss. My point about using a strict cash basis o...

Question: A new church treasurer takes over the "books" and notices that the church janitor and the church nursery provider have had no FICA tax withheld, yet have been issued Form W-2s with no FICA being withheld just as if they were ministers who are exempt from FICA tax. She understands that independent contractors are self-employed and have no FICA withholding, but she has not run into a situation where non-ministerial church employees have no FICA withheld. Can this possibly be right? Answer: According to IRS Publication 517 : "Churches and qualified church-controlled organizations (church organizations) that are opposed for religious reasons to the payment of social security and Medicare taxes can elect to exclude their employees from FICA coverage. If you are an employee of a church or church organization that makes this election and pays you $108.28 or more in wages during the tax year, you must pay SE tax on those wages. "Churches and church orga...

Question: A church encourages attenders to contribute to its benevolent fund to help needy individuals. Is it acceptable to make benevolent fund disbursements directly to individuals instead of, for example, issuing checks to health providers to help with extraordinary medical bills? Answer: First, let me encourage readers to type "benevolence" in the above search window. You'll get a number of hits for past blog postings, including important clarifications that I'll not repeat here. It's okay to issue monetary assistance directly to a recipient who can then, for example, go to a grocery to buy food for his or her family. However, it is extremely rare for "experienced" churches and Christian ministries to do this. They wish to avoid any confusion as to how the gift should be spent. More than 20 years ago, as a deacon of my church I was part of an unfortunate experience. A family was in need. The church issued a check to the dad. The check was cas...

Question: How much influence may donors exercise on the disbursement of church benevolent funds that they have contributed to? Answer: As members of a local church congregation, donors to benevolent funds may help to identify and encourage the church's aid of individuals in need just as those who do not contribute may. Often, donors to these type of funds are among the more sensitive to observing these needs so it is not surprising that they may be the originators of discussions by the church leadership to consider making benevolent disbursements. Having said this, the process must be an open one. Clearly, once funds are donated they must be fully under the control of the church. The church must be very careful to avoid becoming a conduit for donor "contributions" that really satisfy their own personal obligations. For example, a donor's gift that is designated to pay her granddaughter's Bible camp admission or youth activity to visit the local amusement p...