MinistryCPA - Corey A. Pfaffe, CPA, LLC

Question: A church recently made its congregation aware that they can give personal Christmas gifts to pastoral staff (if they choose), but that members would receive no charitable contribution credit for tax purposes. Is it correct that those personal gifts are not taxable income to the staff members since they don't run through the church records at all, but are simply personal gifts? Answer: This assumption is correct. There are two ways members of a congregation can give gifts to staff members. One involves corporate action and the other involves personal and individual action. 1) The church can take up a collection for staff members. In this case, the contributions are deductible to the donors, but must be reported as income to the staff members since they are deemed payments received from an employer. 2) Church members can give directly to staff members. In these cases, the donations are not deductible to the donors, but the staff membe...

Question: Members of a local church recently went on a mission trip. Part of the purpose of their trip was to carry a sum of cash to a foreign mission agency for use in its mission. This amount was donated by the home church of the members. The individuals paid for their own expenses so that the entire donated amount was given to the mission agency for use in the field. Does the church need to issue Form 1099’s to the individuals? Answer: No, the church does not need to issue Form 1099-MISC’s to the individuals since the church, in effect, donated the money to another tax exempt organization. However, the church should receive documentation from the mission acknowledging receipt of the money. This ensures that all of the money was used by the foreign mission agency, and not by the individuals to cover travel expenses. Some ministries provide cash to volunteers for foreign travel. Careful documentation of personal travel, local transportation, meals ...

Question: A church recently received notification of its new federal Employer's Identification Number (EIN) which stated that it must file Form 940, Form 941, and Form 1120. Why does the church have to file these and can it avoid doing so? Answer: Churches as tax exempt organizations are not subject to filing corporate income tax returns (Form 1120). Further, as tax exempt organizations, churches are not subject to federal unemployment tax (Form 940).  Most churches are however responsible to file Form 941 on a quarterly basis. On this form, churches report employee earnings and withholdings, and employer taxes due. Form 944 may be requested instead of Form 941. But a new employer must request the opt out by calling or writing the IRS. For the opt-out deadline, see Rev. Proc. 2009-51: Rev. Proc. 2009-51 . Smaller churches will find it advantageous to file the Form 944 as it is filed only once a year.  However, some small churches with only a solo-pastor who has no ...

Question: I realize that an employer cannot make contributions to a Roth IRA; only the owner (pastor) can. However, can the church deduct an amount from the pastor's pay and make the IRA payment directly to the bank or company that administers the pastor's Roth IRA account? (Realizing that the contribution has to be added to the Pastor's gross income reportable on Form W-2.) Answer: Yes. This facilitation is permissible; essentially, it's no different than withholding from the pastor for any other "convenience" payment that is not a statutory / tax-free benefit. The same conditions apply relative to contributions to a Traditional IRA account on behalf of the pastor.

Question: A church is considering renting its building to another church in the evenings and its second parsonage house to a family. What are the tax ramifications of doing this, since this is not normal income for a church? Answer: There are both potential Unrelated Business Income Tax (UBIT) and local property tax concerns. First, tax exempt organizations generally do not need to report rental income as unrelated business income (UBI) unless it is financed with tax exempt debt instruments. " Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. Rents from personal property are not excluded" (IRS Publication 598). However, depending on your local municipality assessor’s office, the conversion of church use of a parsonage to rental property to a non-church staff member may cause the property to be placed back on the local real estate tax roll. We recommend the church contact th...