This blog posts answers to questions given to us by ministers and others serving in Christian ministries advancing the gospel of Jesus Christ. It also discusses other financial topics that those in gospel ministries face. We trust the information provided can be helpful to you.
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Pastors Hit by New Tax Law: Wait—Maybe Not So Much!
A pastor no longer gets a benefit from writing off his unreimbursed ministry expenses. True?
NOT TRUE! The most valuable tax benefit for pastors who don’t get fully reimbursed for their ministry expenses by their church or Christian ministry IS STILL AVAILABLE.
TRUE … The Tax Cuts and Jobs Act (TCJA) enacted in December 2017 jettisoned the itemized deduction for unreimbursed employee business expenses. But, based on our experience serving more than 100 ministers, missionaries and ministry workers annually, the TCJA did not take away the most valuable tax benefit of writing off unreimbursed ministry expenses.
Ministers are considered “dual status employees.” This means, among other factors, that most pay their own social security and Medicare taxes—a tax rate of 15.3%. Non-minister employees typically have only 7.65% withheld from their paychecks, while another 7.65% is contributed by their employers.
As we suspected when the TCJA was enacted, and now confirmed in 2018 IRS Publication 517 (page 8, January 17, 2019), ministers who are employees of a church or other Christian organization and incur unreimbursed ministry expenses are allowed to reduce their self-employed taxable income reported on IRS Form 1040, Schedule SE. An attachment explaining the allowable expenses must be provided to the IRS, but unlike the loss of an itemized deduction for unreimbursed ministry expenses, this advantage survived the TCJA.
For example, a minister who incurs $1,000 of out-of-pocket expenses for ministry mileage, air travel, lodging, conferences, meals, publications and other costs will enjoy a reduction of an effective $141 of self-employment tax that is unavailable to typical non-minister employees.
Question: A church rented space from another church last year. Should it request a completed Form W-9 and issue Form 1099-MISC? Answer: Payments from one 501(c)(3) organization to another 501(c)(3) organization are not subject to Form 1099-MISC reporting. The IRS Instructions for Form 1099-MISC state that "payments to a tax-exempt organization" are exempt from reporting a Form 1099-MISC. The following are typical examples of payments of $600 or more by a church which are subject to reporting a Form 1099-MISC: Rent paid to an individual (non-corporation) Payments for services rendered by individuals who are not employees (e.g. janitorial service, facilities, snow removal, guest speakers) Support sent directly to missionaries
Question: A church is setting up QuickBooks for its accounting, but its personnel have little experience with fund accounting. What are the entries for the receipt and disbursement of designated gifts and the opening balances? Answer: We recommend that most churches that do not need to present financial statements in accordance with Generally Accepted Accounting Principles (GAAP) observe the following steps. Even those churches that do report using GAAP can employ these methods but must make some adjustments when preparing their financial statements. What we will demonstrate relates to what most churches call "designated gifts" (CPAs call these Temporarily Restricted gifts). These are gifts that donors contribute with the intention that the church will spend the funds as they direct. Most churches do not receive "endowment gifts" in which donors prohibit the expenditure of the core gift (CPAs call these Permanently Restricted gifts). Only earnings on the subsequ
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