MinistryCPA - Corey A. Pfaffe, CPA, LLC

Question: I have read that donors should not write the name of a missionary directly on their checks to churches or mission agencies.   Rather, they should include it on a separate piece of paper.   I have always believed this to be an urban legend.   Isn't the real issue whether the church or agency has direct control over the gift, and therefore gifts would still be deductible even if the missionary's name was written on the check? Answer: You are absolutely correct; this is a myth. While it may give an appearance of impropriety, the question at issue here is not the designation, but rather control over the gift. A designation becomes an issue if it is made in such a way that it serves personal purposes.  A donor who writes the missionary's name on the check does not endanger the deductibility of the gift, as long as 1) the missionary has already been identified by the church as a worthy recipient or 2) the church subsequently confirms, of its own volitio...

Question: A mission agency runs a school in a foreign country and pays its directors (who are ordained or licensed ministers) a housing allowance as part of their salaries. The ministers avoid income tax on the allowance, but do incur self-employment (SE) taxes. Can the agency pay for the housing directly and correspondingly reduce the salaries of the directors in order to decrease their SE tax burden?  Answer: The agency can certainly pay for the housing directly; however, under normal circumstances, this will not decrease the SE tax burden on the directors. Because the directors still receive the housing benefit, even though it is paid directly to the landlord, it will be taxable as a housing allowance. In essence, the total tax will be unchanged since the IRS sees no change in the true nature of the compensation. Possible exception to the above information: If paid directly by the agency, the benefit may be non-taxable under very strict guidelines provided by the IRS i...

An important news update that may affect ministries and tax-exempt organizations across the country: On Friday, November 22, 2013 Federal Judge Barbara Crabb of the Western District of Wisconsin ruled in favor of the Freedom from Religion Foundation (FFRF), declaring the minister's housing allowance unconstitutional. It is important to note, first of all, that this will have no immediate effects. Additionally, only this specific district is affected by the ruling unless it is upheld by a higher court. Presumably, this case will be appealed to the Seventh Circuit Court of Appeals in Chicago, which will rule for Wisconsin, Indiana, and Illinois. Until the Seventh Circuit rules on the appeal, the unconstitutionality ruling will not be enforced. The specifics of the ruling: Judge Crabb held that the housing allowance provides benefit to religious organizations and ministers that has no corresponding secular benefit. The provision of a church-owned parsonage as a tax-free benefit ...

Question: A church staff member recently passed away. His wife remains a current employee. If a memorial fund is established for the family of the deceased employee, can the church (her employer) make a non-taxable  contribution to the memorial fund, even though it benefits a current employee and her family? Answer: Multiple factors must be taken into consideration to determine the taxability of a disbursement of this nature.  First, the "gift" cannot be disguised compensation, (e.g. previously undisbursed vacation pay for the deceased employee). Even if it is designated by the church as a gift, the disbursement may be taxable as compensation if the IRS deems it to be pay that he was owed for previous services. Additionally, the contribution cannot be made in anticipation of future services by the wife; if this is judged to be simply advanced compensation, it will be taxable. Also, the church should consider whether contributions of this nature have been a common practic...

Question: Our church is a small employer. We currently offer health benefits to two of our pastoral staff. How does the Affordable Care Act affect our church beginning January 1, 2014? Answer: The Affordable Care Act (ACA) market reforms will affect almost all employers who provide health benefits to their employees. Each small employer must wisely plan for the changes effective January 1, 2014. MinistryCPA has researched the ACA on behalf of its small-employer clients in consideration of the organizational and business situations under which they operate. Because each small employer is unique, MinistryCPA works with small employers on a client-by-client basis.

Question: I am a missionary in a restricted country, and a large part of my ministry is providing humanitarian and medical aid to individuals. I receive my financial support directly from my church, which issues me a Form 1099-MISC. Can I deduct my humanitarian aid expenses for income and self-employment tax purposes? I have considered using the Schedule C gift deduction, but the $25 per-client limit on deductions is highly restrictive. Also, the nature of the expenses does not seem to fit the IRS guidelines for business gifts. Answer: Since IRS Publications do not address every possible category of deductible expenses, general principles must be applied in this situation.  IRS Publication 535  describes allowable business deductions: "To be deductible, a business expense must be  both ordinary and necessary. An ordinary expense  is one that is common and accepted in  your industry. A necessary expense is one that  is helpful and appropriate for your tra...

Question: As the minister of a small church, I receive no compensation. I do, however, work a secular job for which I am compensated, and I use the earnings from this job to cover my housing expenses. Can I apply to the IRS for a housing allowance designation of this income? Answer: Unfortunately, no. According to IRS Publication 517 , " The church or organization that employs you must officially designate the payment as a housing allowance." A housing allowance is designated by your employer, not the IRS, and is available only on income from ministerial services.

Question: We recently answered a question related to a church opening its parking lots for patrons of a nearby football stadium in exchange for donations (read the previous post here: Stadium Parking Income for a Church ). In relation to that situation, a reader asks why the church may be subject to UBIT (unrelated business income tax) if the work is performed by volunteers. Answer: The question references an exception to UBIT in IRS Publication 598, which states, "Any trade or business in which substantially all the work is performed for the organization without compensation is not an unrelated trade or business." Again, please reference our earlier post for more on the specifics of an unrelated trade or business.  This exception would seem to include the situation under consideration, but the phrase "substantially all the work" is extremely important in determining whether income is exempt. This issue was addressed in IRS Letter Ruling 982206, issued Janua...

Question: Having just turned 60, I am in the process of planning my retirement, so I would like to get an idea of how much I can expect for Social Security benefits each month. Can I simply apply a percentage to my average monthly wages over my working life to get an estimate? If not, how does the Social Security Administration (SSA) calculate my monthly benefit? Answer: In our last post on Social Security, we discussed calculation of the average indexed monthly earnings (AIME), which is the basis for monthly benefit calculation.The SSA uses the term "primary insurance amount" (PIA) to denote the monthly benefit available to an individual at full retirement age (FRA). PIA is calculated based on two different "bend points" determined by the SSA. Each year, the bend points are adjusted based on the same national average wage index used to index for AIME purposes. Up to the first bend point, retirees receive 90% of their AIME. This provides a first level of signifi...

Question: Having just turned 60, I am in the process of planning my retirement, so I would like to get an idea of how much I can expect for Social Security benefits each month. Can I simply apply a percentage to my average monthly wages over my working life to get an estimate? If not, how does the Social Security Administration calculate my monthly benefit? Answer: Unfortunately, the process is more complicated than that; you can access a monthly benefit projection by creating an account on the SSA website . Benefits are based on Social Security earnings; that is, only earnings that have been subject to Social Security tax are used in the calculation of benefits. Additionally, the SSA uses a number called averaged indexed monthly earnings (AIME). This number is important in that it forms the basis for calculation of monthly benefits.  AIME is calculated based on the 35 highest years of Social Security earnings for an individual. For example, an individual born in 1948 whose e...

Question: Are reimbursements for gifts of a non-religious or benevolent nature allowed under an accountable reimbursement plan for a church? For example, could a pastor who purchases flashlights for the members of a Sunday School class be reimbursed? Answer: Gifts are a normal business expense, and are clearly addressed by IRS Publication 463: "If you give gifts in the course of your trade or business, you can deduct all or part of the cost." As such, they are allowable as expenses to be reimbursed if they satisfy the requirements of that publication. However, according to the publication, "You can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year." For more details, see   IRS Publication 463 .

Question: What are the implications of a church using monies from the general fund to sponsor the children of its members to attend a Christian summer camp? Could the church also pay for staff members' children to attend? Answer: Many churches use monies from either the general fund or a designated "Camp Scholarship" fund to help families who do not have the financial resources to send their children to a Christian camp. This benevolence is deductible to the donors and non-taxable to the recipients. Churches must be careful to a void becoming a "conduit" for  re-characterizing  a donor's payment of a personal obligation as a contribution to the benevolent fund. For example, while the church may offer scholarships to send children to a Christian camp, it should not accept a family member's contribution with the designation that it be forwarded to one of his or her own family members. Gifts to staff members are taxable. However, if the church as a ...

Question: A church located next to a football stadium opens its parking lot to fans on Saturdays when the team has a home game. This happens about half a dozen times each year, and the parking lot is manned by volunteer church members. Parking is free, but the volunteers do solicit donations. Does this arrangement affect the church's tax-exempt status? How much control can these volunteers have over the church's use of the donations? Answer: First, this situation will not affect the tax exempt status of the church. Non-ministry related sources of income, although they do not affect the tax exempt status of the church, may be subject to unrelated business income tax (UBIT). According to IRS Pub. 598, churches may be subject to UBIT on " income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits deriv...

Question: Our church has filed for the Small Business Health Care Tax Credit since 2010. Are there any changes in this credit for 2014? Answer: Yes, the IRS has released proposed regulations that will change the requirements for any small business or eligible tax-exempt organization desiring to claim the credit.   The proposed regulations include the following: The employer must obtain and pay premiums through a Small Business Health Options Program (SHOP) Marketplace, which is an exchange to be established under the Affordable Care Act for small businesses. The maximum credit increases for small businesses to 50% (from 35%) and for eligible tax-exempt organizations to 35% (from 25%). There is a two-consecutive year filing limit beginning with tax year 2014. Meaning, if the employer files for 2014 and 2015, the employer may not file for 2016. Claiming the credit for prior periods (2010 through 2013) is not included in the two-consecutive year filing limit. Transition...

Question: I feel that I have a good grasp on the details of my retirement benefits and have reached full retirement age (FRA), but my wife and I have decided that I should wait to retire until age 70 in order to receive delayed retirement credits (DRC). However, my wife would like to begin receiving monthly benefits. I have heard the term "spousal benefit" in the past, but am not sure how that works. Can my wife collect some sort of benefits on my record? Answer: Short answer: yes! Under the rules of Social Security, the spouse of a worker who delays retirement until age 70 in order to receive DRCs (increased retirement benefits after one has reached FRA) can collect benefits on the working spouse's record. This will not affect the amount of benefits that the working spouse can collect once he or she elects to begin receiving benefits. A non-working or low-wage spouse should consider choosing the spousal benefit. In order to accomplish this, the working spouse w...