MinistryCPA - Corey A. Pfaffe, CPA, LLC

The IRS has issued 2021 standard mileage rates. These rates begin on January 1, 2021, and apply to the use of a car, van, pickup or panel truck. 56 cents per mile for business miles driven (down from 57.5 cents in 2020). 16 cents per mile for medical purposes (down from 17 cents in 2020). 14 cents per mile driven in service of charitable organizations (no change from 2020). More information is available on the IRS's website .

Question:  How do I calculate the Fair Rental Value of my home used to determine my Housing Allowance exclusion? Answer: Fair Rental Value (FRV) is important to establish when a minister is provided a parsonage or housing allowance. When a pastor is provided a parsonage, the fair rental value he reports is subject to SECA tax (social security and Medicare). The fair rental value is also a factor in the three part test used to determine how much a pastor can exclude as housing allowance. IRS Publication 517  (Jan 2020) describes that under the three part test, a minister "may exclude from gross income the smallest of 1) the amount actually used to provide a home, 2) the amount officially designated as a housing allowance, or 3) the fair rental value of the home, including furnishings, utilities, garage, etc."  Because fair rental value is needed both when a minister has a parsonage and a housing allowance MinistryCPA often receives questions regarding its calculation. Furt...

Question: Are gifts given to a pastor from church members considered taxable income to him? Answer: To determine if the gifts are taxable to the pastor the following items must be considered.  An important consideration in determining the taxability of gifts is whether they were given through the church or directly from individuals. From the perspective of the IRS, if the church takes corporate action as an employer in collecting and distributing the gifts, then the gifts are taxable to the pastor as an employee of the church (for example, an annual Christmas collection). Also, according a recent court case, if the church regularly solicits members to give through a structured program, this also indicates that the gifts are taxable to the pastor. In Felton v. Commissioner the court determined that a church's solicitation of members to use special blue envelopes to insert cash gifts which were handed directly to the pastor after each collection led to taxable income to the pastor. A...

Road to Gold , by Ben Peterson We are privileged to serve our client Ben Peterson and Camp of Champs, the wrestling ministry he founded   and directs. Ben wrestled for more than 16 years, coached on a collegiate level for 28  years, and has directed Camp of Champs for more than 40 years. We have read his autobiography and found Ben's dedication to the sport and his faith to be inspiring. If you are looking for a good story we highly recommend Ben's  Road to Gold. In Road to Gold , Ben shares the lessons he learned throughout his upbringing and how they led him to achieve Olympic victory. Ben states a key element of his youth was the consistency of his parents. He was encouraged to read the Bible every day from an early age, which he now describes as the most stabilizing habit in his life. Throughout his story Ben also emphasizes the importance of confidence, solid goals, hard work, and consistency. These qualities helped Ben throughout his life and wrestling career, from ...

Question:  Why wouldn't a contribution designated to a missionary be recorded as a Liability instead of an Equity Fund account as you suggest? Then when the money is sent to that missionary the entry would simply reduce the Liability account. Answer: Generally Accepted Accounting Principles (GAAP) states that donor designated gifts, including missions funds, are considered donor restricted funds. As restricted funds it is best practice to record designated gifts as equity accounts, which falls under GAAP standards. This is true regardless of whether the restriction is temporary or permanent. Temporarily restricted gifts are gifts given by the donor for a specific purpose or program or for use at a certain time. In a church, common temporarily restricted funds might include a missions fund, benevolence fund, building fund, and others. Permanently restricted contributions are gifts given by the donor to be permanently maintained, but the church may use any income that comes from the ...

Question:  What is the best approach to recording the receipt and disbursement of designated gifts in QuickBooks? Answer: There are three ways we recommend tracking receipts and disbursements for designated gifts. Each of these alternatives will come to the same conclusion at year end on the Statement of Financial Position (aka, the "Balance Sheet"), showing the same beginning- and end-of-year balances.      1) The first approach is to post the receipts and disbursements of each designated fund throughout the year to a single equity account. The benefit of this is that you will always have a real-time balance of remaining funds. The total receipts and total disbursements can also be viewed on QuickBooks by creating a "Transactions by Account" report and view the total credits (receipts) and debits (disbursements) of the desired designated fund. An additional benefit is that no year-end closing entries need to be made, as everything is posted directly to the equity a...

Question: Our church would like to set in place an accountable minister's expense reimbursement plan to reimburse our pastor for any professional expenses he incurs. What needs to be done establish an accountable plan? Answer: Under accountable plans, eligible ministry expenses reimbursed to employees are not taxable as income. To establish an accountable plan an employer must follow three rules. For a more extensive discussion of these rules and guidelines see our previous blog post linked below.      1) The expenses must be business related.     2) The expenses must be substantiated in a reasonable period.     3) The employee must return any excess reimbursement or allowance to the employer. Following these rules is enough to establish an accountable plan. However, while there is no requirement to have the plan in writing it may be wise to create a written plan to ensure that the guidelines and rules are followed. A recent article (Feb 2020) in t...

Question: The pastor of a small church is furthering his education while fulfilling his duties as a minister. He wishes to complete a master's degree to improve his knowledge and abilities as a Christian leader. If the church pays the university for its pastor's master's degree, is the benefit taxable income to him?  Answer: There are two options to be considered when answering this question. The IRS provides two avenues in which education benefits provided by the employer may be excluded from taxable income, each with separate requirements. The education assistance may be excluded from income if it qualifies as a working condition fringe benefit or is part of an educational assistance program. 1) Working Condition Fringe Benefit If education benefits meet certain requirements they may qualify as a working condition fringe benefit, and therefore be excluded from income.  IRS Publication 15-B (2020) describes the specific requirements that must be met for job-related educat...

The Unseen Presence , by   Mel Goebel  We are privileged to serve our client Mel Goebel and the ministry he recently founded--Life Relaunch. We have read his autobiography and found it to be both encouraging and challenging. If you take the opportunity to read his story, we believe you'll be thankful that you did. The Unseen Presence  is a moving story of Mel Goebel's troubled upbringing and how Christ rescued him. Mel became involved in drugs and alcohol at an early age, and found himself in prison at 20 years old. The turning point in Mel's life was when he met another prisoner whom he referred to as a "Jesus freak." After skeptically questioning this "Jesus freak," Mel was challenged to read the Bible himself. Through reading a Bible borrowed from a chaplain he learned of salvation, and turned to Christ. The  Unseen Presence  describes the ministry God provided Mel after his salvation. Having a burden for other prisoners Mel began to work with Prison...

Question: A church member wishes to become a missionary, and will spend the next six months training out of state. His church wants to pay for both his training and his living expenses (e.g., food, travel expenses, etc.) during that time so he can stay fully committed to his training. Is this support considered taxable income? Answer: In this situation, the individual in training is considered either an employee or an independent contractor of the church because he is being compensated for helping the church fulfill one of its responsibilities, the Great Commission. It may turn out, though, that he will end up with little taxable income. In determining whether the expenses paid by the church are considered taxable income, it is important to identify whether the individual's assignment is temporary or indefinite . The IRS provides a couple key indicators in determining the correct assignment.  The first indicator considers the amount of time spent away from one's main place of w...

Question: A church supports a missionary with a generous monthly disbursement to his mission agency. This regular monthly amount is disbursed from its general fund as a budgeted expenditure. A donor has made a contribution earmarking the same missionary with a designated gift. The church has not solicited or maintained a designated fund for this missionary. What alternatives might the church consider to handle the contribution? Answer: A church may apply one of two alternative policies to handle unsolicited designated contributions.  1.) While every missionary family could certainly put additional funds to good use, the first alternative implies the assumption that the current monthly amount from the church provides a very minimal or insufficient amount to support his or her work. Hence, additional support enabled by designated gifts will be most welcome, encouraged, and solicited. Because the designated gifts are above and beyond the budgeted amount, a separate designated fund mus...

Question:  Church members were planning to participate in a church-sponsored mission trip, and the participants have raised funds from various donors. Unfortunately, due to COVID-19 the trip was cancelled, and the church disbursed to the  participants  the funds that had been raised .  Should a Form 1099 be filed for any amount refunded in excess of $600? Answer: While the COVID-19 pandemic may be a rare occurrence, it is not uncommon for individual members to find it necessary to cancel their participation. When members cancel their participation for any reason, including the scenario described above, there are two ways we recommend the church handle the funds raised for the mission trip. The first is that the funds be returned to the original donors. Because the donors had provided their gifts for specific individuals to attend the trip, which is no longer taking place, the funds could be refunded to the donors. The second option is to place the monies in a designa...

Question:  A church had a guest speaker fill the pulpit twice during the span of the year. For those two times, the speaker received a total of $1,000 in honorarium ($500 per Sunday). The church issued him a Form 1099-NEC for that amount.  However, during the course of the year the speaker and his wife encountered substantial hardship. Is it permissible that the church choose to offer assistance to the speaker from its benevolent fund? Will a gift of this nature be taxable income to him? Answer: To determine whether the gift is considered taxable income in this case, let's consider the following. 1) The nature of the gift.               The nature of the gift should be entirely benevolent. If the gift is given to supplement the less than fair value amount paid to the speaker for his services, or with the expectation he will speak again in the future, the gift is considered income and is taxable to the individual.  Benevolent disburs...

Question:  How should a church record online donations in the following situations? Additionally, what amount is the donor allowed to deduct as a charitable contribution? 1.) The processing fee is deducted from the donor's gift.  2.) The donor pays the additional processing fee.   Answer: 1.) The processing fee is deducted from the donor's gift.               For example, an individual gives $100 to the church and the payment processing company charges a $3 processing fee. The church will receive the net amount of $97. We recommend that the church record the full amount of the gift, $100. The church will then record an expense to account for the $3 processing fee. The donor receipt will reflect the gross amount ($100), which is the amount deductible to the donor as a charitable contribution. 2.) The donor pays the additional processing fee.               In this case, the donor ...

Question:  Why is it best to credit donor designated contributions to Designated Fund Equity accounts rather than Income accounts, as you propose in your recent post? (" Debits and Credits for Designated Gifts ") Answer:  In most cases, the Income accounts in QuickBooks relate to the receipt of General Fund contributions. At the end of each fiscal year, those Income accounts close into the balance sheet General Fund account. The same process is followed regarding General Fund expenses. The effect of posting designated gifts and disbursements to Income and Expense accounts which are closed into the General fund balance combines them with all other financial transactions thus zeroing out any remaining unexpended designated gift amounts. Some ministries have avoided this by keeping a second set of records, which is unnecessary in our opinion. A charitable organization will naturally want to maintain its Designated Fund balances which will carry over from one year to the next w...

Question:  A not-for-profit organization wants to establish two ministries with similar but independent operations, for example, a men’s ministry and a women’s ministry. It wishes to prepare and implement a budget for each ministry and wants the ability to create reports for each ministry. Ultimately, it wants any excess or deficiency of receipts compared to disbursements for a given year to be “remembered” as the ministry continues year upon year. Additionally, donors are occasionally solicited to contribute to short-term special projects with the promise that their donations will be spent only for that temporary project. For example, perhaps the women's ministry wishes to received designated contributions toward a one-time equipment purchase. How might an organization accomplish these multiple objectives: 1) tracking men's and women's ministry general fund balances year-on-year, and 2) tracking special projects' receipts and disbursements?  Answer: Before addressing ...

Question: The following question rolls out of content provided in a previous post: " Debits and Credits for Designated Gifts ." How do I generate a report in QuickBooks that shows the monthly starting balance, change for the month, and the ending balance for each Equity account relating to Designated Gifts? Answer: Our answer here will be consistent with the above cited blog post. In it we discussed simplest approach to handling Designated Funds that we can suggest.  We will illustrate assuming the use of QuickBooks Desktop. Some of these instructions may be slightly modified for users of QuickBooks Online. The following are the necessary steps: 1. Select the "Reports" pull-down menu 2. Under "Accountant & Taxes" choose "Trial Balance" 3. Modify the date range to reflect the desired period 4. Double-click on the amount for the Equity account of interest This will generate a "Transactions by Account" report.

On March 23, 2020 , a governmental order was given to close all “non-essential” businesses due to the coronavirus outbreak.   These words fell heavy upon the community and left the hearts and minds of every business owner questioning who was considered essential and what does an essential business look like during a pandemic? Mullen’s Dairy Bar, in Watertown, Wisconsin was such a business.   We asked Adam Keepman, operator and chef of Mullen’s, to share his journey with us and how Mullen’s has changed through COVID-19. As we spoke with Adam over lunch, he looked pleasantly comfortable with all the busyness surrounding us. Our first question addressed the “most challenging obstacle” during the pandemic. “Was it customers, vendors or possibly finances?” we asked. His answer matched the initial reaction for many of us.   “My biggest obstacle was myself, keeping cool, being positive and productive. I had to be able to look at the situation with a clear head. I also sp...

Most of our small business clients are now focused on Step 2 of the Paycheck Protection Program (PPP) loan process - FORGIVENESS. While we're waiting yet again for clarifications from Congress and the Small Business Administration (SBA) on the rules for forgiveness, this may be a good time to reflect on small business banking relationships. While national banks have received the most PPP loan attention from the popular press, we've been pleasantly surprised with the superior quality of our clients' experiences with smaller regional or state banks. There have even been a couple of credit unions that have participated in the SBA programs and aided our clients. Our clients have found these financial institutions almost without exception to be more responsive to small business needs than some of the national banks. Don't get us wrong. We've also worked with individual bank professionals at these larger institutions who are serving well, so we don't want to ...

Question:   Are churches required to file a Form 944 annually to report their employees' earnings and tax-withholdings? A quarterly Form 941 (rather than an annual Form 944) is required of some employers. Which IRS form, if any, should be filed? Answer: According to IRS Section 1402(c) and 3121(c), ministers are not subject to mandatory income tax withholding. Unless one or more ministerial employees request non-mandatory withholding, church employers with only ministerial employees do not need to file Form 941 or Form 944.  The IRS  Ministers Audit Techniques Guide  explains in further detail a minister's treatments for Social Security, Medicare tax, and income tax withholding.   Form 941 or 944 must be filed when non-ministerial employees are compensated or when ministers request withholding. When can a church file the annual Form 944 rather than filing Form 941 each quarter? The IRS may permit the annual filing of Form 944 for employers wh...

Question: What bookkeeping system should our treasurer use to keep the church books? Answer: The bookkeeping system used by a church must be compatible with current and future treasurers’ training and experience. To adopt a system that is overly complex or suitable for only a highly qualified bookkeeper may create grave difficulty when there is turnover in the treasurer’s position. The following are several solutions that small local churches have found useful: 1. Accounting software . Intuit QuickBooks Desktop or Online and Sage (formerly Peachtree) are two general purpose accounting software packages. There are some church/ministry specific systems, such as Shelby Systems . These more specific software options tend to be more costly but also tend to have the features that the others do not.  All these software options offer government reporting, payroll processing, donor management, bank reconciliation tools, use of bank feeds (downloading transactions), budg...

Question: Should I "opt out" of the Social Security system? Answer: First, some background information: The Internal Revenue Code (IRC) exempts ministers from mandatory federal and state income tax and Medicare and Social Security (FICA) tax withholding by their employers. However, if they do not elect to have income tax withholding, then most ministers must file and pay federal and state estimated tax vouchers. In any case, the employers of ministers are not permitted to withhold and match the 7.65 percent FICA tax. Instead, the minister (unless he opts out of the Social Security system) is responsible to pay the entire 15.3 percent self-employment tax (SECA). Many ministers elect to have additional federal income tax withheld so that the excess can be applied to their self-employment tax obligation at the time they file their annual Form 1040. Now, let's consider what opting out of Social Security might mean: 1.  A minister  may apply to opt out of the S...

Question: How can the church and I work together to sell the parsonage and get my family into a home of our own? Answer: The answer varies greatly based on the church’s and minister’s specific situation. However, the following are several issues that likely need to be addressed.       1.  Any property transferred by the church to the minister will be considered taxable compensation at its fair market value (reduced by any payment by the minister to the church).       2.   Because the minister will no longer be living in real estate that is exempt from property taxes, his costs of living will increase accordingly.       3. An excludable housing allowance is governed by a three-part test . Some ministers may believe that designating as housing allowance a one-time, large bonus from the church, which the pastor intends to use as a significant down payment, will fully qualify as exempt income under the three-part test...

Question: Our church is looking to apply for 501(c)(3) status. What are the advantages and disadvantages of pursuing formal recognition as a 501(c)(3) organization? Answer: To be tax-exempt under Internal Revenue Code § 501(c)(3), organizations (e.g., churches) must be organized and operated exclusively for exempt purposes set forth in the IRC. Additionally, a 501(c)(3) organization must not be organized or operated for the benefit of private interests (referred to as "private inurement"). Churches are automatically classified as IRC § 501(c)(3) entities regardless whether they have been formally recognized by the IRS. Yet, there are reasons to pursue formal recognition. Those that do receive this recognition receive from the IRS a Tax Determination Letter. Advantages : 1. Church schools that wish to apply for grants will likely need to provide a Tax Determination Letter since foundations do not want to disseminate funds only to find that they were contributed to disqu...

The “Families First Act” requires virtually all small employers to extend sick leave to affected employees, but a tax credit will help small business and not-for-profit organization employers pay for it. Following are the most critical provisions, we believe, for small employers: ·     1.  Public Health Emergency Leave (Division C of the Act effective April 2, 2020) – Small employers who have “ employees who are unable to work (including telework) due to a need to care for a child under age 18 if school or child care is unavailable due to a public health emergency” are required to: o   Provide paid leave “if needed by any employee who has been employed at least 30 calendar days,” o    Pay them “at a rate no less than two-thirds of the regular rate of pay” for public health emergencies declared by a federal, state or local authority that extend beyond 10 days (“employees may be required to use existing accrued leave during the first 10 days”...