MinistryCPA - Corey A. Pfaffe, CPA, LLC

Question: A church has a member preparing to go to the mission field. Before she leaves she is required to be debt-free, including college loans of $35,000. If friends give money to the church with the understanding that the funds may be used for the purpose of repayment, are the gifts deductible since they are given to the church? Answer: It is a very common experience that missionaries supported by a church have friends in the congregation. These contributions are tax-deductible as long as the church has established a fund and communicated its interest to support the missionary's endeavors. Typically, a church will forward these funds to the missionary's mission agency since it provides oversight in his or her financial matters. Churches that issue this compensation directly to the missionary must comply with the reporting requirements of the Internal Revenue Code--using Form W-9 to obtain the missionary's name, address, and identifying number and using Form 1099-MI...

Question: At times, a church gives out monetary "thank you" gifts to volunteers regularly involved with ministry. It has considered this to be a "benevolence." Since there is a "service" done, though with no monetary reward in mind, is this still benevolence, or should this be considered a Form 1099-MISC item? Also, if this is done on a regular basis, would this now be considered more of an employer/employee item? Answer: These gifts should be considered taxable income. If the "volunteers" are independent contractors, then Form 1099-MISC should be issued to each individual paid $600 or more. Employees should be issued Form W-2 with applicable withholdings. IRS Publication 3079--Tax Exempt Organizations and Gaming--addresses some of these issues with an example. While I personally am opposed to gaming activities, the IRS position on volunteers can be seen by reviewing portions of the publication. "Example: ABC Organization operates ...

Question: Is it allowable for a minister to use funds from his professional expense reimbursement plan to pay for the registration of his wife at a Christian conference? Can the minister and his wife be classified as a “ministry team” and therefore allow such an expense? Answer: IRS Publication 463 indicates that an employer cannot deduct payments (or reimbursements, including those through an accountable plan) for a spouse accompanying an employee "on a business trip or to a business convention," unless that spouse is also 1) its employee, 2) has a bona fide business purpose for the travel, and 3) would otherwise be allowed to deduct the travel expenses." These rules also apply to tax-exempt employers (e.g. churches) even though they are unconcerned about losing deductions since they pay no income tax in the first place (Federal Tax Regulation 1.132-5 (t)(2). However, this does not necessary give the whole picture. Internal Revenue Bulletin No. 1996-26, Re...

There are a lot of church planting websites with ideas and services offered to church planters. But what list might an accountant provide for a new church to consider? Initial Budget Prepare a budget forecasting both outside support and initial giving by the families expected to charter the new church. Determine the pastoral compensation level that the new congregation can realistically provide. Project costs for meeting facilities (secure a lease). Use church planting resources to develop proper strategies for initial communication and outreach; project the costs to implement the strategies and adjust based on the realities of financial resources. Organization Establish a constitution and by-laws. Incorporate with counsel of an attorney familiar with laws for tax-exempt organizations in the state. Pastor Compensation Work with the pastor to establish a wise compensation and benefits package. Consider establishing a professional expense reimbursement plan, either using an “...

Question: Your blog posts on February 18, 2010, and January 12, 2011, (accessible by typing "sabbatical" in your search window) offer the only specific statements along these lines that I can find, anywhere. I would like to have as much authority behind me as possible. Can you please refer me to something from IRS or others that provide the authority for your statements? Answer: Both blog postings reference IRS Publication 463. Chapter 1 of the 2010 edition offers on only 6-7 pages of content a good initial read. Chapter 6 includes roughly 4 pages on reimbursements under Accountable and Nonaccountable Plan rules. The Publication defines travel expenses that qualify and offers extensive examples. Further, its section on accountable plan rules offers direction to churches wishing to set up arrangements that establish reasonable reimbursement plans. Here's a link to the Publication in .pdf format: IRS Publication 463

Question: A minister creates a DVD depicting his experiences as a missionary. He sells the tapes and uses all of the proceeds to make additional copies of the DVD and to have it translated into several languages. He uses none of the DVD proceeds for personal expenses. Does he need to report the DVD proceeds and how does he treat the DVD costs? Answer: The minister will need to file Schedule C along with his personal tax return. The sales represent revenues and the DVD costs represent deductible expenses. Typically, a minister will retain an outside firm to duplicate the DVDs, buying in bulk in order to save money. These purchases of DVDs are subject to inventory rules that the minister's tax preparer will need to apply.

Question: My question concerns a church's categorizing of church employees as independent contractors to avoid paying taxes and workers compensation insurance. Can you shed some light on this? Answer: The IRS makes available Form SS-8 to aid in the determination of employee versus independent contractor status. I've provided a link here: IRS Form SS-8 Further, the IRS provides the following guidance: "In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered. "Facts that provide evidence of the degree of control and independence fall into three categories: "Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? "Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is pai...

Question: The IRS Minister Audit Technique Guide says, "The retired minister may exclude from his/her net earnings from self-employment the rental value of the parsonage or the parsonage allowance received after retirement" ( http://www.irs.gov/businesses/small/article/0,,id=210018,00.html ). How does the IRS define "retired" in this sense? Answer: IRS Publication 517 also refers to the self-employment tax-free status of post-retirement allowances designated as housing, but does a slightly better job explaining the conditions. Both sources relate to IRS Revenue Ruling 58-359 (yes, from the year 1958!). If retirement were defined as the-time-I-start-collecting-social-security-retirement-benefits, then many pastors would be elated to stop paying the 15.3 percent SE tax since they often continue ministering to congregations on at least a part-time basis well after reaching typical retirement age. Unfortunately, this is not the case. A church that allows its pas...

Question: A pastor terminated his position with a church and moved to serve a new church started in another state. The pastor's former church/employer is going to send support to this pastor through the end of the year, even though he is no longer employed by them and will not be providing any services to them . Can the income be reported in Box 3 of Form 1099-MISC as Other Income thus avoiding self-employment taxes? Alternatively, should the church continue to report the support as pastoral W-2 wages and designate it as housing allowance? Answer: Box 3 of Form 1099-MISC is reserved for Other Income--"prizes and awards that are not for services performed." Regardless whether a minister's compensation is considered wages as an employee or non-employee compensation as a self-employed individual, for purposes of self-employment tax he is considered as self-employed. Accordingly, he must file Schedule SE and pay SE tax (unless he has been recognized by the IRS as e...

Question: How many years can IRS chase after a minister who didn't report SE tax for the housing allowance? Answer: I'll let the IRS' own FAQ answer this one: "Generally, the IRS can include returns filed within the last three years in an audit. Additional years can be added if a substantial error is identified. Generally, if a substantial error is identified, the IRS will not go back more than the last six years. ... "More information related to extending a statute of limitations can be obtained in Publication 1035, Extending the Tax Assessment Period." From Publication 1035: "The statute of limitations for IRS to assess and collect any outstanding balances does not start until a return has been filed.In other words, there is no statute of limitations for assessing and collecting the tax if no return has been filed."