Transparency In Ministry

According to recent tax law changes and

Accounting Today, vol. 20 no. 17, September 18 – October 1, 2006 edition,

What a deal!

Effective for donations made after August 17, 2006, deductions for charitable contributions of clothing or household items are limited to items in good used condition or better. According to Accounting Today, vol. 20 no. 17, September 18 – October 1, 2006 edition,

the IRS may deny charitable deductions for clothing or household items of minimal value. Exception…only for single items if the claims deduction exceeds $500 in value and a qualified appraisal is included with the tax return. While the new tax law requires that the donations meet the “good or better condition” standards, there is no guidance on what value should be placed on those permitted contributions.

What a deal...more paperwork and validation!

Starting in 2007, small cash donations will absolutely need some paperwork behind them, or no charitable deduction is allowed. What does this mean?? According to Accounting Today, vol. 20 no. 17, September 18 – October 1, 2006 edition,

donors of charitable contributions of cash, checks or other monetary gifts must maintain either a bank record (bank statement), letter or other written communication from the donee indicating the name of the donee organization, the date that the contribution was made and the amount of the contribution.

Under IRS Reg. Paragraph 1.170A-13(a), the same rules remain the same…however the new requirements codify what has been a burden of proof requirement and bring it forward to a requirement for taking the deduction.

The new paper Deal! More trees...

According to the 2006 Association of Certified Fraud Examiners Report to the Nation,

64.1% of the cases were committed by employees and only 18.1% were performed by anonymous individuals. 37.7% of all fraud perpetrators have been with the organizations for over 10 years.

Unfortunately for accountants, the largest percentage of fraud was committed within the accounting departments of organization, closely followed by the Executive Management. This doesn’t mean that accountants are less trusting. Willie Sutton a famous bank robber in the 30s answered a reporter who asked why he robbed banks by saying "because that's where the money is." Who is more likely to commit fraud within an organization?

Anyone with the opportunity.

Most fraud is detected by tips from others or by accident. Therefore organizations should take tips seriously. Organizations should consider the establishment of a Hotline for individuals to make anonymous tips to the risk of fraud, especially in light of the Sarbanes-Oxley legislature. This internal control has become an increasingly greater used resource to increase the tips of fraud for employees that have detailed knowledge of the organizations.

From the 2006 Association of Certified Fraud Examiners Report to the Nation

See the full report at: http://www.acfe.com/documents/2006-rttn.pdf

All expenses of a discrete joint activity should be reported as fund-raising rather than allocated between fund-raising and other components. In order to overcome this presumption for each discrete joint activity, each of the criteria of purpose, audience, and content must be met for the activity.

Purpose – This criterion is met if the purpose of the discrete joint activity includes accomplishing program (other than cause education) or management and general functions. (Call to Action)

Audience – This criterion is met if the audience is selected for one or more of the following reasons:
1. The audience’s need to use or reasonable potential for use of the action called for by the program component of the joint activity.

2. The audience’s ability to take action to assist the entity in meeting the goals of the program component of the joint activity other than by making contributions to the entity; or

3. The entity is required to direct the management and general component of the joint activity to the particular audience or the audience has reasonable potential for use of the management and general component.

Content – This criterion is met if the content of the joint activity supports program or management and general functions.

Audience Rebuttable Presumption
The audience criterion contains a rebuttable presumption concerning prior donors. If an audience for a discrete joint activity contains prior donors, the joint activity is considered to be fund-raising unless it can be demonstrated that the audience was also selected for a program or management and general purpose. To overcome this rebuttable presumption the organization should determine that its donors have also participated in a program activity that is related to meeting the mission of the organization. This will require analyses of audience participation in program components that show positive relationships between program participation and contributions or that donors are more likely than non-donors to take the action step called for by the program component of a joint activity.

Reporting joint costs, if material, may be critical in properly reporting program, management and general and fundraising costs in the statement of activities. Watch for the next update on how to determine allocating these costs.

Many times board members, lenders, and ministers have made requests that their organization obtain financial statement services from CPA firms. The services most commonly requested are as follows:

Compilation – A compilation is the compiling of numbers creating financial statements. No attestation procedures procedures are performed. A compilation is limited to presenting in the form of financial statements information that is the representation of management. No opinion or any other form of assurance regarding the accuracy of the information is rendered.

Review – A review consists principally of inquiries of management and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. However, we make a statement that we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles. Therefore, limited assurance to the accuracy of the financial statements is provided.

Audit – An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

What type of service do you need?Contact us.

The ministry can pay expenses for volunteers on ministry trips, as long as the volunteer performs meaningful and significant service during the trip. Publication 526, "Charitable Contributions" specifically states that if there is no significant element of personal pleasure, recreation, or vacation in the (charitable) travel, the expense of travel on behalf of a charitable organization is deductible (and conversely, if paid for by the organization, not taxable income). The publication also says the deduction for travel expenses will not be denied simply because you enjoy providing services to the charitable organization. Even if you enjoy the trip, you can take a charitable contribution deduction for your travel expenses if you are on duty in a genuine and substantial sense throughout the trip. For more information see Publication 526.

What if the volunteer is a minor?The fact that the volunteer is a minor, should not impact the inclusion of paid-for travel expenses in an individual's income, if it meets the criteria otherwise of having no significant element of personal pleasure. Furthermore, the ministry has the discretion to determine those travel expenses that it will pay without adverse consequences, as long as it meets the above criteria.

Sandy Siegfried
Shareholder

According to the FASB website http://www.fasb.org
the Financial Accounting Standards Board has published for public comment exposure drafts of two proposed FASB Statements of Financial Accounting Standards (SFASs) intended to improve the accounting and disclosures for mergers and acquisitions (M&A) by not-for-profit organizations.
Exposure Draft No. 1500-100 - Not-for-Profit Organizations: Mergers and Acquisitions, would replace Accounting Principles Board (APB) No. 16 (APB Opinion No. 16:), Business Combinations, and related interpretative guidance provided in AICPA Audit and Accounting Guides (AAG), Not-for-Profit Organizations, and Health Care Organizations, to prohibit not-for-profit organizations from using the pooling-of-interests method of accounting when accounting for a merger or acquisition. The proposed SFAS would instead require a not-for-profit organization to apply a four-step acquisition method, that would (a) identify the acquirer, (b) determine the acquisition date, (c) recognize and measure the identifiable assets acquired and the liabilities assumed, and (d) recognize and measure either goodwill acquired or a contribution received.

Exposure Draft No. 1500-200 - Not-for-Profit Organizations: Goodwill and Other Intangible Assets Acquired in a Merger or Acquisition, would conform the accounting by a not-for-profit organization for intangible assets acquired in a merger or acquisition with the accounting for all other acquired intangible assets. Specifically, the proposal would amend the effective date and transition provisions of SFAS No. 142, Goodwill and Other Intangible Assets, to make those provisions effective for a not-for-profit organization that acquires identifiable intangible assets in a merger or acquisition. A not-for-profit organization accounting for an identifiable intangible asset recognized in accordance with the proposed SFAS would therefore apply the guidance in SFAS No. 142 (as amended by the proposed SFAS) and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

Comments for both exposure drafts must be received no later than January 29, 2007; the Board has scheduled a public roundtable meeting for Tuesday, March 27, 2007, to discuss the exposure drafts. A not-for-profit organization would be required to apply either proposal prospectively in its fiscal year that begins approximately six months after the issuance of a final SFAS, with early application encouraged. A not-for-profit organization also would be required to apply the transition provisions of Exposure Draft No. 1500-200 to intangible assets that were acquired before the adoption of that proposed SFAS and were accounted for using the purchase method. The Board expects that both proposed Statements will take effect simultaneously.

Periodically, ministries may advance funds to employees to pay for designated expense, including travel. If these advances are not substantiated by the employee and repaid…what are the tax consequences to the employee?
Typically these advances are recorded as employee receivables and when repaid (employee submitting third party documentation of the costs incurred), then the ministry expense is recorded and the employee receivable is reduced as follows:
DR Ministry expense $XX
CR Employee advances $XX

However…if the employee never repays the advance within the reimbursement period, then the “loan” can become taxable income and included on the employees W-2. If the employee advance is determined to be uncollectible the following should be recorded in the general ledger:
DR Salaries $XX
CR Employee advances $XX

Contributions that are restricted based on the passage of time, should be recorded as “temporarily restricted” and then “released to unrestricted” when the passage of time has occurred. For example…a donor contributes $20,000 on 7/5/06 which is restricted to be used for medical benevolence as follows: $5,000 in 2006; $5,000 in 2007; $5,000 in 2008; $5,000 in 2009. How is the contribution recorded?

In 2006 – the church/ministry records the following:
DR Restricted cash $20,000
CR Temporarily restricted contributions – benevolence $20,000

DR Medical benevolence (when paid and amount) $5,000
CR Cash $5,000

DR Net assets released from restriction – TR fund $5,000
CR Net assets released from restriction – Unrestricted fund $5,000

In 2007:
DR Medical benevolence (when paid and amount) $5,000
CR Cash $5,000

DR Net assets released from restriction – TR fund $5,000
CR Net assets released from restriction – Unrestricted fund $5,000

In 2008:
DR Medical benevolence (when paid and amount) $5,000
CR Cash $5,000

DR Net assets released from restriction – TR fund $5,000
CR Net assets released from restriction – Unrestricted fund $5,000

In 2009:
DR Medical benevolence (when paid and amount) $5,000
CR Cash $5,000

DR Net assets released from restriction – TR fund $5,000
CR Net assets released from restriction – Unrestricted fund $5,000

Complications occur when multiple programs receive designated contributions. The ministry or church must follow the donor’s designations. If not…funds cannot be legitimately released and expended. Designations may be in writing or verbal. Documention of the donor’s intent is critical in maintaining financial integrity and an “audit trail”.

A senior pastor of a church wishes to purchase a church vehicle for his personal use. How is the sale recorded by the church? What are the tax implications to the pastor?

Fair value of the vehicle (adjusted for wear/tear) at the time of the sale will be used as the selling price. If the sale is consummated by an actual check written by the pastor, then the vehicle sold for $8,000 (with a net book value of $0 (cost less accumulated depreciation) is recorded in the general ledger using under the following scenario:
DR CASH $8,000 (as an example)
DR Accumulated depreciation $6,000
CR Vehicle $6,000
CR Gain on sale $8,000

If the pastor does not purchase the vehicle with a check but would like the sale to be included on part of his compensation, then his W-2 would include the sales price of the vehicle. This transaction would affect his annual compensation and should be approved by the board of compensation committee.

According to the RIA Payroll Guide Newsletter (preview) 11/10/2006, Volume 65, No. 23 the IRS has revised the instructions for Form 941, Employer's Quarterly Federal Tax Return. It has also made some changes to Form 941c, Supporting Statement To Correct Information. The revisions are effective October 2006.
Form 941 instructions. The IRS advises filers to use a minus sign when reporting a negative amount as a tax adjustment on line 7, instead of parentheses. For example, report "–10.59" rather than "(10.59)." This action enhances the accuracy of the IRS scanning software. The Service does note, however, that it will allow parentheses if a filer's software only allows for parentheses in reporting negative amounts.
The IRS has also revised some mailing addresses for Form 941 (see page 4 of the Form 941 instructions). The mailing address is determined based on taxpayer location and whether a payment will be included with the return.
Form 941c. The following new check boxes have been added to line A of Form 941c: (1) Form 944, Employer's Annual Federal Tax Return, (2) Form 944(SP), Employer's Annual Federal Tax Return (Spanish Version), and (3) 944-SS, Annual Employment Tax Filing for Small Employers. These forms are new for calendar year 2006. Filers of these forms who wish to make adjustments for prior years should check the appropriate box on line A (e.g., Form 941 or 941-M) and file Form 941c with Form 944, 944(SP), or 944-SS.
RIA Research References: For more information on filing Form 944, see RIA Payroll Guide 4237.