CPA's & Consultants Providing Business Insight To Churches & Ministries

Federal Court Declares Housing Allowance Unconstitutional

On November 22, 2013, the US District Court for the Western District of Wisconsin ruled that the payment of a tax-free housing allowance to members of the clergy is unconstitutional. The court did not challenge the rent-free use of a church-owned parsonage that is provided to ministers. The judge decided that the law violates the First Amendment’s “establishment clause” because it provides a benefit to religious persons that is not afforded to the secular public. The same plaintiff who brought the challenge (the Freedom From Religion Foundation), is also challenging the church exemption from filing Form 990 and has brought a lawsuit against the IRS for allowing churches to violate the law by engaging in political speech.

Tax Considerations in Giving

Here are two ideas that you may want to publicize to your giving base for ways to contribute to your organization in an even more tax advantaged way:

1. If you are 701/2, consider giving your required minimum distribution (or more) of up to $100,000 from your IRA directly to {the not-for-profit organization}. This may save overall taxes, especially if you are not able to itemize otherwise, or have medical deductions. This strategy may also lower your taxable social security and Medicare premiums.

2. Did you know? There are tax advantages in giving appreciated stock held for more than one year. Giving the stock to {the not-for-profit organization} and then letting {the not-for-profit organization} sell the stock eliminates you paying capital gains taxes, but still allows you to take a deduction for the full market value of the stock.

Sequestration Reduction to Health Care Tax Credit

As a result of the federal budget cuts required by Sequestration, the IRS has announced an 8.7% reduction in the amount of the refundable health insurance tax credit for nonprofit organizations. The automatic budget cuts went into effect on March 1, 2013, and the reduced tax credit rate will be in effect until September 30, 2013 (or intervening Congressional action), at which time the rate may be changed. The refundable health care tax credit is available for small employers, including nonprofit organizations, who provide health insurance for employees. For nonprofit organizations, the credit is a refund of payroll taxes which were required to be paid in during the year. See the IRS announcement at http://www.irs.gov/uac/Affordable-Care-Act-Tax-Provisions.

Possible New Reporting Requirements for Churches

As noted in an earlier posting, the Religious Policy Commission issued a report to Senator Grassley (R-IA) in December 2012 in which they made recommendations for Congressional and IRS oversight over churches and religious organizations. The following new requirements were recommended for churches. First, the largest churches should participate in a survey of executive compensation so that comparable data can be gathered and reported to the public. Names of churches and staff members would not be identified – only the summary data. Secondly, the IRS should provide guidelines for when it is appropriate for charities to use compensation data from the commercial sector when setting executive compensation.

IRS Raises Amounts for Token Items Given to Donors

Typically, for any gift over $75, charitable organizations must provide a written disclosure including an estimate of the fair market value of the items provided to the donor. However, this disclosure is not required in certain circumstances, such as when the gift is of a certain minimum amount and the items provided are “token items”, which are defined as low-cost items bearing the logo, colors or other identification of the organization. The amount that is considered “low-cost” is adjusted each year for inflation. For 2013, items with a cost of $10.20 or less are consider low-cost token items. The minimum amount of the gift must be $51 or more. Another exception to the disclosure rule is when an “insubstantial benefit” is provided to the donor, provided the benefit does not exceed 2% of the amount of the gift or a maximum of $102. For example, if the donor makes a contribution of $5,000, the charity could provide a benefit with a value up to $100 (2% of $5,000) without any disclosure requirement. See IRS Publication 1771 and Rev. Proc. 2012-41; 2012-45 IRB 1 for more information.

Off Duty Police Officer is Independent Contractor

Many churches hire off duty policemen to assist with traffic control or provide security, and the question normally arises as to whether to treat them as part-time employees or independent contractors. Wages paid to a part-time employee would be subject to tax withholdings, and the individual could become eligible for other employee benefits. On the other hand, payments to an independent contractor are not subject to withholdings, and the person is not eligible for employee benefits. A recent tax court case considered this issue, and in this case, the off duty policemen was considered to be an independent contractor. He was paid by the hour, and the company that hired him did not provide him with any training or control the details of his job. He provided his own uniform and carried his own gun. His pay was reported on Form 1099-MISC, and he was required to report the income as a self-employed independent contractor. For more information about the case see http://www.ustaxcourt.gov/InOpHistoric/Specks.TCM.WPD.pdf

Report on Accountability for Religious Organizations Released December 4, 2012

The Commission on Accountability and Public Policy for Religious Organizations has released its long-awaited report to Sen. Charles Grassley (R-IA) with their recommendations for government oversight of religious nonprofit organizations including churches. The report addresses areas such as executive compensation, housing allowance, IRS registration and tax reporting requirement for churches, and IRS audits of churches. The Commission takes a very strong stand against further intrusion by the government into the oversight of churches. However, the commission does make recommendations for better practices of developing systems for accountability and controls over executive compensation. To request a copy of the complete report, go to:
http://religiouspolicycommission.org/

I Heart Change

Upheaval is the new norm – Accepting the reality that change is here to stay can actually help you view each new shift as something exciting. Embracing change may be a great catalyst for your church. The use of technology has already been widely adopted, from online giving, to use of the cloud storing financial data, to streaming video or audio online. Social media is also becoming a key method of deploying information from churches, as well as a way for members to get involved and become invitational within their communities. There are also shifts taking place during the traditional Sunday morning services. Many churches are periodically doing large scale service projects or gathering for meals during that time. It might be worthwhile to consider how your church could innovate. Is there uncharted territory that you need to jump into?

IRS (Finally) Agrees to LLC Subsidiary Charitable Deduction

Many nonprofit organizations conduct certain operations related to their charitable activities through a separately formed Limited Liability Company (LLC). Under existing US tax law, an LLC that is wholly owned is disregarded for tax purposes and its activities are combined with its owner. Thus, nonprofit organizations utilizing LLC’s assumed that the operations of their LLC entities would qualify as tax exempt and contributions to those LLC’s would be allowed as tax deductible. But clear guidance from the IRS on this issue was not forthcoming until this week when it issued Notice 2012-52 making it clear that donations to charity owned LLC qualify as tax deductible. This guidance is effective as of July 31, 2012; however, taxpayers can rely on this ruling for earlier tax years for which the statute of limitations for refunds or credits hasn’t expired under IRC Section 6511. See IRB 2012-35, 7/31/2012 which will be posted at http://www.irs.gov/irb/

Health Insurance Rebates to Church Plans

The Affordable Care Act (health reform law) mandated rebates from health insurance providers if they did not use at least 80% of premiums to provide health care services. The first of those rebates are due by August 1, 2012. Rebates to church plans exempt from ERISA will be divided equally among all participants and sent directly to them, unless the plan had previously sent a written statement to the insurance company. The church must then use the rebate to reduce premiums for the upcoming year or issue refunds to employees.

The rebates issued directly to plan participants (either from the insurance company or the Church) will generally be taxable to the employees. Since most health plans are deducted from employee wages on a pre-tax basis, the refund is considered taxable. On the other hand, if the Church chooses to reduce premiums for the upcoming year, the employees will simply have a smaller amount deducted from the paycheck. Thus a smaller amount is deducted pre-tax, resulting in an increase to the taxable portion of their wages. For more details on the taxability of the rebates, see the IRS article at http://www.irs.gov/newsroom/article/0,,id=256167,00.html .

For most other (non-church) employers, the rebate will be sent directly to the employer or plan sponsor. Health insurance companies have sent letters to the employer and the employees giving notice of the rebate. The letter encourages employees to contact the employer to find out what is going to happen to the rebate, and whether any will be refunded to the employees. The Department of Labor has issued technical guidance on how and when the rebate should be shared with employees (see at http://www.dol.gov/ebsa/newsroom/tr11-04.html). To the extent the rebate is considered to be a “plan asset”, the employer should use the rebate for the benefit of plan participants by reducing participant premiums, enhancing benefits, or issuing a refund. The rebate is generally a plan asset if the premiums were paid from trust assets. The rebate attributable to participant contributions is also considered a plan asset. On the other hand, if the employer is the policyholder, and the entire premium was paid from the employer’s general account, then the rebate belongs to the employer.