MinistryCPA - Corey A. Pfaffe, CPA, LLC

Question: A church provides office space within its church to a local missionary who is raising his support. The church is one of the missionary's financial supporters. This office space is provided rent-free. The missionary is not an employee of the church, but does serve as a member within the church. Is the missionary responsible for any taxes in regards to this office space? Answer: The use is certainly consistent with the church's tax-exempt purposes and ministry emphases. Is is my opinion that the office space as described for use in his mission endeavor is non-taxable. Further, even if it did represent taxable income, the missionary would have an immediate and equal business deduction for rent.

Question 1: Can a pastor who is leaving the church for a position as a full-time foreign missionary (the church will contribute missionary support as the sending church) receive retirement compensation for past services by declaration of the church? What would be the taxability of such an arrangement? Does it matter how long is is paid or whether it is in a lump sum or a monthly obligation? Answer 1: Probably the easiest way for the retirement contributions to be made as implied in this question is to have the church send support to the former pastor's account with his mission agency employer. Then the pastor may make elective deferrals into an Internal Revenue Code 403(b) plan. He can likely contribute in excess of $20,000 per year ( IRS Publication 571 describes the limits). Question 2: Can the church continue to pay for health insurance as a tax-free fringe if the senior pastor is no longer an employee but simply a missionary from the church? Answer 2: Similar to ...

Background: A new missionary endeavor has prompted a "missionary start-up" series of questions. His situation is very typical and may be helpful to rehearse with all viewers of this blog. "The Lord has called me to be a missionary. At this time, I am still working and earning money in the United States. I not ordained at this time. "After sharing my burden with our local church, a mission agency was created by our local church to help facilitate the funding for my family's’ mission needs. The only step that was taken to create the mission agency was to open an account at our church’s bank in the name of [the] Agency. We also opened a sub-account under the agency in my own personal name. [The church's agency] received a Tax ID number for this account. [Since 2009, contributions] have been accumulating in the two accounts. "No money was taken or used from either account until August of [2010] when I took a survey trip. During my trip, I incurred e...

Question: An intern at a church receives as part of his compensation a direct payment by the church to reduce his school debt. If the church pays off his loans will that be considered income for tax purposes? Answer: The loan payments will be taxable as standard wages. If he is or should be treated as a licensed minister then he will have no withholding. However, he will be obligated for both income and self-employment tax. A housing allowance could reduce his income tax to the extent he pays for his own housing. Of course, he could also consider "opting out." If he is not a minister (not recognized by the church as called to the gospel Ministry and eligible to marry, bury and baptize) then both the cash and loan payments are subject to FICA withholding and matching by the church. His compensation will be classified as any other non-ministerial employee (e.g., administrative assistant, facilities manager). He would not qualify for a housing allowance since only minist...

Question: A church provides direct support to a missionary -- both through the church budget and from additional contributions received designated to his ministry. What reporting requirements does the church have? Answer: Since the church disburses directly to the missionary, it should issue Form 1099-MISC. If it wishes, the church can establish arrangements, for example, to reimburse documented business expenses and to designate a portion of the support toward housing. Absent these provisions, the entire amount should be reported annually on Form 1099-MISC.

Question: A mission agency inquires as to the amount included on Form 1099-MISC filed each year. The office believes that the should be the total of all of the support that came in for the missionary during the year. Most of its missionaries zero out their accounts each month (i.e., what comes in to the agency's account each month goes out to the missionary immediately). A missionary asks the agency to deposit a set amount each month into his/her personal account and to leave the rest in the hands of the agency. A clarification is needed as to whether the amount received by the agency or the amount disbursed to the missionary is the proper amount to record on Form 1099-MISC. A nswer: The answer to this question relates to a tax concept called "constructive receipt." If a mission is simply acting as a clearing house for contributions and missionaries have unlimited and unsupervised access to funds held on their behalf, then all funds are taxable to the missionary ...

Question: An employee of a church was given a gift from the church benevolent fund to assist with curing a personal financial problem. Should the church withhold the taxes on this benevolence from the employee's pay check, or simply issue a W-2 to the employee, or do nothing? Answer: It is wise to be careful when distributing gifts to employees from the church's benevolent fund. As one might imagine, supplementing an employee's low pay with, presumably, non-taxable gifts from the benevolent fund could be tempting. Nevertheless, most churches do distribute benevolent fund gifts to members and non-members in the community who have emergency financial needs. These funds have been collected from donors who wish to be generous with those in need; they are not motivated to disguise compensation. Accordingly, I believe that one-times gifts such as the one described above should be classified as benevolent gifts that are non-taxable and non-reportable on Form W-2 or any oth...