Transparency In Ministry

According to RIA Payroll Guide Newsletter (preview) 11/10/2006, Volume 65, No. 23 the IRS has revised Notice 931, Deposit Requirements for Employment Taxes, for 2007. The notice provides information on deposits of Social Security, Medicare, and federal income taxes.

For electronic deposit requirements - all depository taxes (e.g., employment tax, excise tax, and corporate income tax) must be made electronically in 2007 using the Electronic Federal Tax Payment System (EFTPS) if:

(1) an employer's total deposits of such taxes in 2005 were more than $200,000, or

(2) the employer was required to use EFTPS in 2006. A 10% penalty may be assessed against employers who are required to use EFTPS but who use a Federal Tax Deposit Coupon (Form 8109 or 8109-B) instead.

The lookback period for quarterly return filers (based on an employer's deposit schedule - monthly or semiweekly) is based on the total taxes (not reduced by any advance earned income credit payments) reported on Form 941, Employer's Quarterly Federal Tax Return.

In a four-quarter lookback period (based on the employer's deposit schedule for 2007) is based on the lookback period beginning July 1, 2005 and ending June 30, 2006.

If an employer reported $50,000 or less of Form 941 taxes for the lookback period, it is a monthly depositor. If it reported more than $50,000, it is a semiweekly depositor.

For annual return filers (Forms 943, 944, 945, and CT-1), the lookback period is the calendar year preceding the previous year. The lookback period for 2007 tax deposits is 2005.
The IRS considers a new employer's tax liability to be zero, which makes new employers monthly depositors for their first year of business.

Exceptions to monthly and semiweekly rule are as follows:

1.If employers accumulate a tax liability of less than $2,500 during a quarter for Form 941 (during a calendar year for Forms 943, 944, 945, and CT-1), no deposits are required if they pay their tax in full with a timely filed return.
2. If employers accumulate a tax liability (reduced by any advance EIC payments) of $100,000 or more on any day during a deposit period, they must deposit the tax by the next banking day regardless of whether they are a monthly or semiweekly depositor.

Notice 931 does not apply to federal unemployment (FUTA) tax. See the Form 940 instructions for information on depositing FUTA tax.

RIA Research References: For more information on EFTPS, see RIA Payroll Guide 4289. For more information on depositing federal income and FICA taxes withheld, see RIA Payroll Guide 4285.

New accounting standard requires entities to record obligations associated with postretirement plans

According to the FASB website
The Financial Accounting Standards Board has published FASB Statement of Financial Accounting Standards (SFAS) No. 158 (SFAS No. 158), Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, to require an employer to fully recognize the obligations associated with single-employer defined benefit pension, retiree healthcare, and other postretirement plans in their financial statements.
Previous standards required an employer to disclose the complete funded status of its plan only in the notes to the financial statements. Moreover, because those standards allowed an employer to delay recognition of certain changes in plan assets and obligations that affected the costs of providing benefits, employers reported an asset or liability that almost always differed from the plan's funded status.
Under SFAS No. 158, a defined benefit postretirement plan sponsor that is a public or private company or a nongovernmental not-for-profit organization must (a) recognize in its statement of financial position an asset for a plan's overfunded status or a liability for the plan's underfunded status, (b) measure the plan's assets and its obligations that determine its funded status as of the end of the employer's fiscal year (with limited exceptions), and (c) recognize, as a component of other comprehensive income, the changes in the funded status of the plan that arise during the year but are not recognized as components of net periodic benefit cost pursuant to SFAS No. 87, Employers' Accounting for Pensions, or SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. SFAS No. 158 also requires an employer to disclose in the notes to financial statements additional information on how delayed recognition of certain changes in the funded status of a defined benefit postretirement plan affects net periodic benefit cost for the next fiscal year.

Application of SFAS No. 158 requires the initial recognition of a defined benefit postretirement plan and related disclosure by (a) the end of the fiscal year ending after December 15, 2006, for employers with publicly traded securities, and (b) at the end of the fiscal year ending after June 15, 2007, for all other employers.
Initial measurement of plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is required for fiscal years ending after December 15, 2008.
Earlier application of the recognition or measurement date provisions is encouraged, but must be for all of an employer's benefit plans.
Retrospective application is not permitted.

For auditors of financial statements, the AICPA has issued a new auditing standard effective for periods ending on or after December 15, 2006.

AICPA Statement on Auditing Standards (SAS) No. 112, Communicating Internal Control Related Matters Identified in an Audit - establishes new standards relating to the auditor's responsibility to communicate to an entity's management and to individuals charged with the entity's governance significant deficiencies and material weaknesses identified during the course of an audit of the entity's financial statements.

SAS 112 replaces SAS 60 on reporting internal control matters to the client. Some of the key changes are:
1. required to communicate to management and those charged with governance

2. report both significant deficiencies and material weaknesses

3. definition of significant deficiency makes reference to likelihood of even occurring (more than a remote likelihood)

4. must be made within 60 days of issuance of audit report

5. effective for 2006 calendar year ends (i.e. year ends after 12/15/06)

What is a significant deficiency or a material weakness? Watch for posting #2 for Communicating Internal Control Matters.

As a recap from Communicating Internal Control Matters post #1 of 2, the AICPA Statement on Auditing Standards (SAS) No. 112, Communicating Internal Control Related Matters Identified in an Audit - establishes new standards relating to the auditor's responsibility to communicate to an entity's management and to individuals charged with the entity's governance significant deficiencies and material weaknesses identified during the course of an audit of the entity's financial statements.

What are significant deficiencies and material weaknesses? First let’s define a control deficiency…According to the AICPA,
·..A control deficiency exists when the design or operation of a control does not allow the entity's management (or other employees), while performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is defined as one or more control deficiencies that adversely affect the entity's ability to initiate, authorize, record, process, or report reliably financial data in accordance with GAAP, resulting in more than a remote likelihood that a financial statement misstatement deemed “more than inconsequential” will not be prevented or detected. A material weakness is defined as one or more significant deficiencies that result in more than a remote likelihood that a material misstatement will not be prevented or detected.

What are some of the areas that management should identify as potential deficiencies??
— Ineffective oversight of the entity's internal control over financial reporting.

— The restatement of previously issued financial statements to correct a material misstatement.

— Identification by the auditor of a material misstatement in the current period's financial statements that was not initially identified by the entity's internal controls.

— An ineffective internal audit or risk assessment function.

— For complex entities operating in highly regulated industries, an ineffective regulatory compliance function.

— Identification by senior management of fraud of any magnitude.

— Failure on the part of the entity's management or on the part of individuals charged with the entity's governance to assess the effect of a significant deficiency that has been communicated to them and their failure either to correct such deficiency or to conclude that it will not be corrected.

—An ineffective control environment.

Under this new auditing standard, the auditor is required to communicate to the entity's management and to individuals charged with governance significant deficiencies and material weaknesses identified in the course of the audit. This auditing standard is affective for years ending after December 16, 2006.

It's that time of year. Yes, compensation committees and church boards should be preparing for 2007 and adopting the compensation for employees. In adopting a 2007 compensation package for ministers and lay staff, consider salary as the most basis component of a compensation package. The amount of the salary should be set by the church board and documented in the minutes prior to payment. The compensation package may include salary reduction agreements (ie., various "plans" available for employees).

However, churches should remember that there are consequences to not following the IRS guidelines for compensation. If a church pays unreasonably high compensation – the IRS can:

1. Revoke the church's/ministry's exempt status – IRS has been reluctant to impose this penalty. Tax law does not define what amount is considered unreasonable

2. Impose Intermediate Sanctions – assess excise taxes to “disqualified persons” who are paid “excess benefits”.

According to the 2007 Compensation Handbook for Church Staff, co-authored by James F. Cobble and Richard R. Hammar, a disqualified person can be an officer, director or relative of the designated employee. A disqualified person who benefits from an excess benefit transaction is subject to an excise tax of 25% of the amount of the “excess benefit”.

An excess benefit is the amount by which the actual compensation exceeds the fair value of the services provided. The excise tax is assessed against the disqualified person, not against the employer. If the excess benefit is not corrected, additional excise taxes of up to 200% can be assessed.

It is very important that compensation committees and ministry boards use available resources in determining the “reasonableness” of a minister's compensation. Watch the next post to determine the use of “salary reduction agreements” as a component of ministry compensation.

In adopting a compensation package for 2007, churches may consider including a salary reduction agreement as part of the minister’s or lay staff’s compensation. According to the 2007 Compensation Handbook for Church Staff, co-authored by James F. Cobble and Richard R. Hammar, salary reduction agreements are used to handle certain staff expenses. The objective is to reduce a worker’s taxable income through salary reduction agreements specifically allowed by law. These allowances include:

1.Tax-sheltered annuity contributions

2.Cafeteria plans

3.Housing allowances

For more information on housing allowances, see post #3 of this series of compensation planning.

Housing Allowances…A great tax benefit to Ministers

One of the most important tax benefits available to ministers who own or rent their homes is the housing allowance. For churches who provide a parsonage, the minister may receive a parsonage allowance for designated expenses of the parsonage. These allowances must be designated in advance by the employing church. According to the 2007 Compensation Handbook for Church Staff, co-authored by James F. Cobble and Richard R. Hammar, a housing allowance represents:

1. compensation for ministerial services,

2. used to pay housing expenses, and

3. does not exceed the annual fair rental value of the home (furnished, plus utilities).

Housing related expenses include mortgage payments, utilities, repairs, furnishings, insurance, property taxes, additions and maintenance.

Ministers who own their own home or rent a home or apartment, do not pay federal income taxes on the designated housing allowance. Remember…these allowances must be designated in advance by the church.

However, many churches fail to designate a portion of a minister’s compensation as a housing allowance…and the minister is deprived of an important benefit under the IRS regulations.

A ministry typically reimburses travel costs incurred by employees performing ministry projects. In order for the Ministry to reimburse these costs, what is the reimbursement period and what is the employee required to do?
In order for a ministry to have an “accountable plan” (plan set up by the employer to pay reimbursements or allowances for travel expenses), an employee must adequately account to the Ministry (employer) for the travel expenses within a reasonable period of time. The safe harbor rule indicates that the accounting to the employer should not be more than 60 days after the expense has been incurred. However, it can also depend on the facts and circumstances related to the travel. A prudent policy is reimbursement within 60 days of the event.
Documentation of actual costs incurred should be evidenced by a receipt and the expense should be properly authorized by the designated member of management.

A church has decided to purchase gas cards, valued at $20 each, to give to their employees who make less than $30,000/year. The church will do this for several weeks. Is there a tax implication to the church’s employees?

YES and this is why…

This is considered a taxable fringe benefit according to Treasury Regulation 1.132-6(c) because the items given are gift cards. Any cash or cash equivalents (gift certificates, charge or credit cards) are considered taxable fringe benefits.

Gifts that are designated by a donor for a specific person through a ministry are not allowed and could endanger the ministry’s tax-exempt purpose as well as enable the donor to break the law. These types of gifts are known as “earmarked” gifts. How can a ministry identify an earmarked gift? According to Dan Busby in FOCUS On Accountability there are three tests to identify these types of gifts.
1. Does the gift benefit an indefinite group? If a gift is restricted for one person, then it fails this test.
2. What are the donor’s intentions? The donor’s intentions must be to benefit the exempt purposes of the charity. It can’t be for the benefit of an individual.
3. How much control does the ministry have over the contribution? This test is key. The charity must use the funds to further its tax-exempt purposes. The charity must have full control of the funds and decide how the funds will be used.

Need clarification? Donors should not earmark contributions that the Entity has not previously established as a program or specific outreach of the ministry. If the Entity has established a designated individual or ministry that will receive support, then yes, the donor can designate the ministry or individual. To help eliminate the confusion, if a donor wishes to contribute to a specific ministry...call the Entity and inquire about specific outreaches and missions before the donation is given.

What a deal!
You can make cash and contribute property at the same time. How? By making a “bargain sale” to a charity. Sell the property for a bargain rather than selling at full price on the market and get a charitable contribution deduction for the fair market value less the selling price to the charity. Double benefit for the giver!! Of course you would need to report capital gains on the sale of the property. The charity in turn would give the donor a statement that cash was given in exchange for the gift.