MinistryCPA - Corey A. Pfaffe, CPA, LLC

Question: Should a church apply for Internal Revenue Code 501(c)(3) status? What are the benefits or disadvantages of applying for such status when it is already treated as exempt from income tax? Answer: IRS Publication 1828 helps to answer these questions. One quote: "Churches that meet the requirements of IRC section 501(c)(3) are automatically considered tax exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS. Although there is no requirement to do so, many churches seek recognition of tax-exempt status from the IRS because such recognition assures church leaders, members, and contributors that the church is recognized as exempt and qualifies for related tax benefits. For example, contributors to a church that has been recognized as tax exempt would know that their contributions generally are tax-deductible." A few BIG disadvantages: The application Form 1023 is 30 pages long and requires a fee. Also, the IRS e...

Question: If a church gave a member a benevolent gift during a time of need should that church then record the gift on the member's giving statement as a negative against which all of that member's future (or past) donations are subtracted? Answer: No, the receipt of a benevolent gift is non-taxable nor does it reduce one's charitable giving deduction. This offers another good reason to properly document the nature of benevolent gifts to assure that they are not mistaken for refunds of previous contributions.

Question: A church hires a Director of Christian Education. Does he qualify for the same tax-status as a pastor (e.g., housing allowance, exempt from income tax withholding, eligible for Form 4361 election)? Answer: The IRS Minister Audit Technique Guide  helps to answer this question. I'll edit out some of the technical citations, but readers should follow the link for more details: "To qualify for the special tax provisions available to ministers, an individual must be a 'minister' and must perform services 'in the exercise of his ministry.' "[Tax rules] require that an individual be a 'duly ordained, commissioned, or licensed minister of a church.' "[Tax rules] provide that service performed by a minister in the exercise of the ministry includes: Ministration of sacerdotal functions; Conduct of religious worship ... "[Tax rules] also provide that whether service performed by a minister constitutes conduct of religious wor...

Question: Can a church provide meals (or other food such as pizza parties for youth) to its members using funds that come from the regular Sunday morning offering? Answer: Presumably we're talking here about occasional church fellowships. Yes, it's okay, as long as it's not disguised compensation for a church employee (e.g. paying for employees' family meals and entertainment on the church tab). I suggest that the budget plan for such expenditures though. Furthermore, it may be a sensitive matter to some who believe it is inappropriate to spend God's money to "feed the flock."

Question: A church gives its pastor a loan to be used to pay down his home mortgage. The condition will be that he will not pay anything back until or unless he leaves the church or sells the home. At that time he would pay the money back without any interest. How this would be treated by the IRS for tax purposes? Answer: IRS Publication 15-A answers this one pretty well: "In general, if an employer lends an employee more than $10,000 at an interest rate less than the current applicable federal rate (AFR), the difference between the interest paid and the interest that would be paid under the AFR is considered additional compensation to the employee. This rule applies to a loan of $10,000 or less if one of its principal purposes is the avoidance of federal tax. "This additional compensation to the employee is [reported as] compensation on Form W-2 (or Form 1099-MISC for an independent contractor). The AFR is established monthly and published by the IRS each month in...

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...

Question We would like to send our pastor on a missions trip, asking our congregation to participate in giving toward this trip. We have a separate Missions Fund to which donors can contribute. They would be instructed to make any checks payable to the church designated to this Fund. All approved expenses for the trip will be reimbursed through this Fund. We have an Accountable Reimbursement policy in place. Can the donors include these gifts as charitable contributions? Will the reimbursements for expenses be non-taxable to our pastor? Answer Well designed plan! The contributions will be tax-deductible to donors and the reimbursements for properly documented ordinary and necessary ministry travel expenses will be non-taxable to your pastor.

Question: "Does a church need to distribute Form 1099 to donors that receive refunds of donations to a building fund. The building will no longer be built, and the church has sent notice that the money in the building fund can either be applied to the debt of the church or returned to the donor. Since these were designated donations, I don’t believe they would have been deductible in the first place, but the church has no way of knowing how individual taxpayers handled this." Answer: First, designated donations to a building fund are typically deductible. A refund will, then, have tax ramifications that each donor's tax professional will need to address. However, the church has no requirement to issue Form 1099. Richard R. Hammar in his 4/23/2009 post on Church Finance Update ( Bottom-Line Training: Refunds of Charitable Contributions; What do we do if a member wants to take back their contribution? ) provides an excellent treatment of this subject. I cannot impro...

Question: A reader asks a follow-up question to my detailed posting on July 15, 2010, regarding churches offering non-interest bearing loans to their pastors. Employee Loan by Church to Pastor Do the same rules apply for a zero-interest loan to a church member (not an employee)? Does the difference between the applicable federal rate and 0% need to be reported on a Form 1099-MISC or other form? Answer: This answer may not be what some will expect, but here it goes: Since the loan is not to an employee or independent contractor in exchange for services rendered, I must assume that the loan is disbursed as a benevolent activity of the church. Therefore, the foregone interest is essentially the "benevolent" act and, as such, is non-taxable (not reportable). HOWEVER, as a church member who has given this kind of "benevolence" a lot of thought, I strongly recommend that the above proposal to loan money to a member as a "benevolent" act be abandoned...

Question 1: An investment advisor "once heard regarding 403(b) plans that distributions from such plans could not qualify for the housing allowance." Later, he "came across several tax sources that say 403(b)(9) distributions may qualify for housing allowance [designation] (the "nine" apparently being the distinguishing characteristic)." Can 403(b) distributions qualify for housing designation? Answer 1: Distributions from 403(b) plans qualify for housing designation. I point readers of this blog to my posting of October 28, 2009: Retired Minister Continued Support from His Congregation Question 2: How does a 403(b)(9) differ from traditional 403(b) plans? Answer 2: Section 403(b)(1) describes TSAs (also known as 403(b) plans) as annuities (Tax-Sheltered Annuities). Section 403(b)( 9 )(a)(i) clarifies that “a retirement income account shall be treated as an annuity contract described in [section 403(b)]." Section 9 simply indicates ...