MinistryCPA - Corey A. Pfaffe, CPA, LLC

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:  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: Can a church give non-taxable gifts to its pastor(s)? Answer: Typically, there are two ways members of a congregation can give gifts to its pastor(s) and staff member(s). One involves corporate action and the other involves personal and individual action. 1. The church can take up a collection for its pastor(s). In this case, the contributions are deductible to the donors, but must be reported by the pastor since they are deemed payments received from an employer as compensation for his services. Any gifts paid by employers to their employees are considered taxable income and must be reported together with other earnings on Forms 941 and W-2 . Additionally, churches should be aware of the Internal Revenue Service's "De Minimis Fringe Benefits" rules. According to IRS Publication 15-B, a de mininis benefit is any property or service provided to an employee that has so little value that accounting for it would be unreasonable or impractical. However, ca...

With recent law changes, the federal standard deduction now exceeds $12,000 for individuals and $24,000 for married couples filing jointly and grows each year with inflation adjustments. With only mortgage interest, state and local taxes, catastrophic medical expenses, and charitable contribution deductions to accumulate, many families and individuals face a seemingly insurmountable wall to exceed the "free" standard deduction and, instead, itemize their own write offs.  Some have even questioned whether charitable contributions are deductible anymore; however, all is not lost! MinistryCPA offers four strategies for you to consider as the 2019 calendar year comes to a close. 1. Many state income tax returns do not follow the federal itemized deduction rules. This allows taxpayers to continue gaining a tax benefit for charitable contributions. For example, a Wisconsin taxpayer with $50,000 of Wisconsin income is granted a standard deduction of $6,709 (married filing ...

Question: Could a church borrow from church members at a 0% interest rate? Do “imputed interest” rules apply to such loans? Is there any limitation that a church member needs to be aware of before loaning funds to the church under these conditions? Answer: To answer the first question, yes, a church could receive loans from church members with a 0% interest rate. This type of loan is usually classified as a below-market gift loan. In a sense, the church member who is lending the money is transferring an annual amount equal to the forgone interest to the church as a gift. The church, however, simultaneously transfers such interest back to the lender. This is the idea of imputed interest. Were it not for limitations related to Schedule A itemized deductions, a donor would report equal amounts of the foregone interest as taxable interest income, but enjoy offsetting charitable contribution deduction. However, an exception to this unfortunate consequence does exist.  Accordi...

Question: A church received a Visa gift card in the offering.  Is this considered a taxable contribution for the person donating it and, if so, how is it handled?  Answer: A gift card is considered the equivalent of cash, so it should be treated in the same way as cash donated to the church. While it is possible to accept gift cards as contributions, the issue lies more with the recording and tracking of the gift, which can be labor intensive. The value of the gift card will need to be determined since its cost may not equal the face value of the card. Why not? The deductibility of the gift card is based on what the donor actually paid for it rather than the value stated on the card. For example….a simple web search of "gift cards at a discounted price" received more than 12 million hits. A second complication: After determining the card's value, the gift must be recorded to a separate general ledger asset account where its value could be tracked. Un...

Question: A church youth group is going on a missions trip this summer. There a few youth members who have yet to bring in the necessary amount needed for their trip. A couple in the church has offered to give towards their trip in exchange for work around their house. How is this treated? Is this allowable? Answer: Our MinistryCPA experience leads us to believe that in most cases the value of the work that is being completed by the youth members is not representative of the donation amount. It often appears to us that the young people are essentially volunteering so that a homeowner will consider making a donation, rather than providing taxable, fair value services. This kind of work is sometimes referred to as a "makework proposition" (e.g. raking leaves, washing windows, trimming hedges).

Question: A church regularly sends out teams on short-term mission trips to destinations hosted by charitable organizations. They have set up a fund for receiving special offerings and for reimbursing travel, meals, and lodging expenses. Recently, a church team was required to pay the hosting organization a fee for each member to cover meals and lodging. The team leader required each team member to make a donation to the fund in the amount of the fee. Are these donations tax deductible? Some argue that the team members are receiving a benefit from the donation and should not receive a tax benefit for the donations. Others feel they should qualify for a charitable donation because the benefit they receive only facilitates their charitable work. Besides, can't these expenses be deducted on the individual's Schedule A as out-of-pocket contributions even if the church doesn't consider them a donation? Answer: IRS Publication 526 says, "Generally, you can claim a c...

Question: A church is sending a married couple on an unpaid short-term missions trip overseas. The congregation has expressed interest in supporting them during their trip. What is the best method to support this couple? Answer: Let us offer two options for consideration. First, the congregation gives directly to the church and designates that the amount goes toward the couple's mission trip. Over time, this fund would accumulate and then be given to the couple before leaving for their trip. This method would require preparation and filing of a Form 1099-MISC at the end of the year. The second option to consider is likely the better of the two. While the couple is on their mission trip, they will submit records of their expenses to the church and be reimbursed for that amount out of the same fund that is designated for them - likely a "Special Projects-Missions Fund" of some sort. Unlike the first method mentioned, this would not require a filing of Form 1099-MI...

Question: A church recently held an ordination service for one of its members who is planning to go on a foreign missions trip. During the service, a $1,000 special offering was taken. Is this offering taxable to the missionary? Is it deductible by the donors? After the offering has been given to the missionary, a friend gives another gift to the church. This gift is designated for the missionary, but "to be used as the church sees fit if the trip is fully funded." Can the church simply give this money to the missionary? And is this also deductible by the donor? Answer: In answering the first part, yes, the offering is taxable as compensation. Essentially, the church is "hiring" the missionary to help accomplish its own Great Commission mission. Because the missionary is "self-employed" for income tax purposes, the church should issue Form 1099-MISC, and the missionary should closely track and report business expenses to facilitate deductibility of thos...

Question: How should a church properly report Gifts in Kind on its financial statements? Are they included on an income and expense report or only on a donor's contribution statement? These gifts could be intangible--for example, free-rent facilities from a landlord or services from a professional--or tangible--for example, a vehicle. Answer: Most churches do not record these gifts in their general ledgers for inclusion on their financial statements. Only churches undergoing independent Certified Public Accountant financial audits would typically consider reporting these amounts and then only if they are material. According to FASB No. 116 (Page 4), "contributions of services shall be recognized if the services received (a) create or enhance non-financial assets or (b) require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation." Regarding donor acknowledgement, the church sho...

Question:   If an employee of the church is provided funds to go on a church mission trip are the funds considered a taxable benefit? Answer: These funds may qualify as a non-taxable, reimbursed business expense. In order for an expense to qualify as a business expense, it must be ordinary and necessary according to IRS Publication 535 . Pub 535 states, “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 trade or business.” As a church employee, one may be expect to assist in fulfilling the mission of the church, including participation in mission trips. Proper documentation of expenses is required to enjoy this non-taxable classification ( MinistryCPA past blog post ). If the trip was not required as a condition of employment by the church, then the employee may be able to take a tax deduction for the trip based on its charitable nature. For further information on c...

Question: As a member of my church's audit team, I have been told many times by the financial secretary that our church takes a love offering for persons serving our church. The love offering is not counted; it is just given to the person. For this reason, no record is maintained for issuing Form 1099s. Is this  procedure in compliance with IRS rules for issuing Form 1099s when payments are $600 or more in a calendar year? Answer: First, the offerings should be accounted for because it appears that the collections are received and distributed as compensation for work that is done for the church. When independent contractors receive more than $600 in a tax year, they must be issued a Form-1099 MISC. Of course, this will require that the offerings be counted and that information be collected from the recipient in order to facilitate filing the proper forms (typically, Form W-9 is used for this purpose). Second, if these individuals are working for the c...

Question: If a mission board is receiving monies for an ordained minister from his friends and family in order to fund his mission trip, are those contributions deductible for the donors? Are the monies received by the ordained minister excluded from taxable income? Answer: Donor side: The contributions may be deductible for the donors. According to Richard R. Hammar in this book 2015 Church and Clergy Tax Guide, "IF a donor stipulates that a contribution be spent on a designated individual, no deduction ordinarily is allowed unless the church exercises full administrative control over the donated funds to ensure that they are being spent in furtherance of the church's exempt purposes. To illustrate, contributions to a church or missions agency for the benefit of a particular missionary may be tax deductible if the church or missions agency exercises full administrative and accounting control over the contributions and ensures that they are spent in furtherance of the ch...

Question: Can a minister make his contributions pretax through payroll? Answer: No, charitable donations may not be taken as pretax through payroll. According to the IRS Minister Audit Technique Guide , “Ministers' contributions to the church are not deductible as business expenses. ...They may still be deducted as contributions on Schedule A, but they may not be used as a business expense to reduce self-employment tax.”

Question: If a church solicits a benevolent offering for a specific family is the benevolent gift taxable to the recipient? Are the contributions tax deductible by the donors? For example, a church family experiences an uninsured fire, and fellow members respond in generosity. Answer: Gifts are excludable from taxable income if they are not compensation for services performed. A gift “proceeds from a ‘detached and disinterested generosity,’ ... ‘out of affection, respect, admiration, charity or like impulses’” (Commissioner v. Duberstein, 363 U.S. 278, 285 (1960)). But if the payments received come from a “the constraining force of any moral or legal duty” the income cannot be considered a gift ( Commissioner v. Duberstein, 363 U.S. 278, 285 (1960)) . Therefore truly benevolent gifts are not taxable to the recipient.  The tax deductibility of a gift by a donor to a fund collected on behalf of a family is dependent on the fact and circumstances of each case. The deductib...

Question: When a church solicits special offerings for visiting guest speakers is the income taxable to the guest speakers, and are the contributions tax deductible by the donors?        Answer: According to  IRS Minister Audit Technique Guide , “Contributions made to or for the support of individual missionaries to further the objectives of their missions are includible in gross income (Rev. Rul. 68-67, 1968-1 C.B. 38)”  (p. 6 of PDF) . The offerings solicited for visiting guest speakers represent compensation for the services rendered. The offering income is taxable to the recipients. The guest speakers may be able reduce this income by business related expenses, but the offering must originally be included as income. Although the income is taxable that does not automatically indicate that the offering will cause a tax deduction for the donors. The deductibility lies in the control of the monies and purpose of the organizat...

**Update to Previous Blog Post : Proposed Change for Donor Written Acknowledgements Yesterday, January 7, 2016, the IRS withdrew its proposed rulemaking change for donor written acknowledgements. Per REG-138344-13 , the IRS received public comments that “expressed significant concerns about donee organizations collecting and maintaining taxpayer identification numbers for purposes of the specific-use information return.” As a reminder though, nonprofits are still required under IRC Section 170(f)(8) to provide donors a written acknowledgement for any gift over $250. Check out our blog’s other discussions on charitable contributions.

Question: I recently attended a conference, and the speaker mentioned that donor social security numbers will need to be collected in the future. The social security numbers will then be included on donor contribution acknowledgements. Is this true? Answer: This is partly true. Published on September 17, 2015, the IRS issued proposed regulations for donee reporting. At the date of this blog posting, the regulations are still only proposed. In addition, if the regulations become final, the donee reporting with donor social security numbers will remain optional. If a nonprofit chooses to use the optional donee reporting, the nonprofit will (1) file a specific-use form with the IRS by February 28 for contributions made in the prior calendar year and (2) provide a copy to the donor by the same February 28 date. The nonprofit will report on the IRS’s specific-use form all current required information (e.g., amount of cash, no goods or services disclosure) and the new required infor...

Question: How do I determine "significant personal time" when I am on a mission trip? Example: I travel overseas for a mission trip and work one week full-time for the mission. The next week, I explore and vacation in the area. As a charitable contribution, can I deduct any part of my airfare, lodging,  and food during the week I worked? Or have I lost the whole amount because I vacationed? Answer: Although the terms "significant personal time" in the question are not given specifically in IRS Publication 526, Charitable Contributions , the publication does describe when traveling costs are deductible for charitable purposes. Here is a quote from page 5 of the publication: Generally, you can claim a charitable contribution deduction for travel expenses necessarily incurred while you are away from home performing services for a charitable organization only if there is no significant element of personal pleasure, recreation, or vacation in the travel. Howeve...