Transparency In Ministry

Scenario: A church located in Missouri has been contacted by a foreign charity to accept contributions from donors and transfer the funds to the foreign entity.

Question: Do the contributions qualify as tax-deductible by the IRS?

Yes – if the use of the funds are subject to the domestic organization's control and aren't earmarked in any way for use abroad, according to IRS Revenue Ruling 63-252. - IRS Revenue Ruling 66-79 further clarifies that contributions to a domestic charitable organization which solicits for foreign grants are deductible if the domestic organization reviews and approves the grants as being in furtherance of its own purposes; and maintains, at all times, full control of the donated funds and discretion as to their use.

No – if the donor specifies that the funds be turned over to the foreign charity, according to Revenue Ruling 63-252.

So, in order to meet the goal of collecting tax-deductible contributions to send overseas, the Missouri Church must continually:

1. monitor the foreign charity’s activities to determine that the activities continue to be in furtherance of the Missouri Church’s tax-exempt purpose. (This can be done by regular reports from the foreign charity detailing the activies of their operations).

2. communicate that donations given to the Missouri Church for the foreign charity are under the Church’s administrative control for use as the Church considers appropriate, and that there is a possibility that the funds will be redirected.

From an administrative standpoint it is more than likely acceptable to create an account to hold funds that the Church believes will be sent to the foreign charity. The account should not be a restricted.

As we enter another season of political activity, we will address certain political activities that are allowed for churches. In accordance with its exempt status, churches may not directly or indirectly participate with a candidate for a political campaign. However certain activities may be allowed depending on certain facts and circumstances.

Revenue Ruling 74-574 and the IRS’ tax guide for churches and religious organizations, provide guidance on the types of activities that are allowed, including the following:

Churches/ministries may:
1. encourage voters to exercise their constitutional right to vote;

2. provide voter education activities using public events or publishing voter education guides;

3. provide a public forum for all candidates to address the church members;

4. neutral voter registration drives.

The activity must remain non-partisan and unbiased.

The following are examples of allowable activities:

Church XYZ allows Candidate A to speak to the congregation on a Sunday evening, under a non-candidate capacity. The senior pastor has stressed to the candidate that he/she cannot promote his candidacy or his personal political preferences during the speech. No campaign activity occurs.

On a Saturday evening before the local city election, the Church allows a public forum for all the mayoral candidates to address the public. No contributions are paid to any of the candidates and all are allowed equal time to discuss their platform and views. A non-partisan narrator allows questions from the public.

Allowable activities for churches are characterized by non-partisan bias; equal opportunity for all candidates; neutral voter registration and an encouragement to vote.

A church or ministry cannot:

1. express a preference for a designated candidate or group of candidates.

2. contribute to political campaigns

3. make public (verbal or written) statements designating a position

What are the penalties for political activities? Possible revocation or denial of the church’s exempt status and possible excise taxes on political contributions paid.

What kind of political activity is allowed for a minister? See the next post.

The Internal Revenue Code recognizes certain entities to receive tax-exempt status – meaning they are exempt from filing/paying federal income taxes. Churches and religious organizations are included in this category. These organizations are generally eligible to receive tax-deductible contributions.

What is a 501(c)(3) organization? According to the Form 1023 instructions, a 501(c)(3) organization must be organized and operated exclusively for one or more exempt purposes.

To be organized the entity must either be:
1. a corporation

2. a trust

3. unincorporated association

The organizing document (ie., articles of incorporation if you are a corporation) must limit the organization’s purpose(s) and permanently dedicate its assets to exempt purposes.

The entity must operate to further the exempt purposes stated in the organizing document.

According to the Tax Guide for Churches and Religious Organizations, an organization seeking to be classified as a 501(c)(3) must meet the following requirements:
1. Organized and operated exclusively for religious, educational, scientific, or other charitable purposes.

2. Net earnings (profits) may not inure to the benefit of any private individual or shareholder.

3. No substantial part of the organization’s activity may be attempting to influence legislation.

4. No intervention in political campaigns

5. Purposes and activities may not be illegal or violate fundamental public policy.

How is a church recognized as a 501(c)(3) organization? Churches that meet the requirements above are automatically considered tax-exempt and are not required to apply for and obtain recognition of the tax-exempt status from the IRS.

HOWEVER….many churches seek to file for exemption and therefore file Form 1023. Why? Certain leadership, members or contributors may want valid documentation that the contributions are tax deductible.

Religious organizations, unlike churches, are required to apply to the IRS for the tax-exempt status if their annual gross receipts exceed $5,000.

How to apply for tax-exempt status? See the next post.

Religious organizations (excluding churches) with annual gross receipts exceeding $5,000 are required to apply for tax-exempt status. To be a 501(c)(3) organization, an organization should submit Form SS-4 Application for Employer Identification Number (EIN), prior to submitting Form 1023. Organizations need an EIN # when opening a bank account and this identification number is utilized in reporting payroll and other information.

See Form SS-4 and instructions.

After the organization has an EIN #, religious organizations should file a Form 1023.

During 2006, Form 1023 (the Form) was significantly revised requiring additional information to be supplied. The following represent some of the significant revisions to the Form:

1. User fee has been incorporated as Part X of the new form, instead of a separate form. (User fee is based on average annual receipts)

2. SS-4 application no longer included in Form 1023.

3. Limited liability corporations added as a type of organization to apply for exempt status.

4. Questions about compensation and financial transactions with officers/directors, certain employees and independent contractors.

5. Filing a separate Form 872-C not required, included in Part X.

6. Schedule E added for organizations not filing the Form within 27 months after formation.

Form 1023 is due with 27 months of the entity’s legal formation. If the Form is not filed within 27 months of formation, the form’s effective date is based on the postmark date to the IRS.

The IRS will provide a written acknowledge after receiving Form 1023. If additional information is needed, the Form will be assigned to a specialist and the organization will be contacted.

If the IRS determines that the religious organization qualifies for exempt status, a “determination letter” is issued by the IRS. The letter will classify the organization as a public charity or as a private foundation. This document should be maintained with the other corporate documents of the organization.

If the IRS denies the organization’s application for exempt status, the IRS will send the organization a letter explaining their position and the organization’s appeal rights.

For a copy of Form 1023 go to Form 1023 and see instructions.

Churches are not required to file Form 1023, but more and more churches are considered filing and obtaining the determination letter.

Need help? Contact us.

As discussed in the previous post, churches may not directly or indirectly participate with a candidate for a political campaign. Contributions to a candidate are prohibited.

This prohibition is not intended to prevent ministers or church leaders from expressing a personal view or bias. The minister, in the exercise of his duties as a minister, cannot endorse a candidate. However, a minister may express his personal views verbally or in writing.

For example:

The senior pastor of XYZ church was interviewed by a local newspaper regarding one of the candidates position on environmental issues. The senior pastor emphasized that his views were personal and did not represent the position of XYZ church or the leadership of XYZ church. Because this interview was not conducted during a church function, documented in a church publication and the minister stressed his personal views, this activity is permitted.

Personal views, stated as such, not expressed in the church setting or in a church publication, are allowed. Ministers have the right to express personal political views, just not in the context of advising or persuading a congregation in his/her role as "the pastor".

Ministers should exercise due care so as not to jeopardize the church’s exempt status.

Occasionally ministers speak for another church and the church collects a love offering that will be paid to the guest speaker. How is the payment reported to the IRS? Is this taxable income to the minister?

If the church paid more than $600 for these services, the church reports these payments to the guest pastor, using Form 1099 Misc. For instructions for Form 1099-Misc, see instructions.

Before February 1st of the subsequent year, a Form 1099-Misc is mailed to the recipient. Before March 1st of the subsequent year the Church files copies of the Form 1099-Misc and a 1096 transmittal form with the IRS.

At the end of the year the guest minister receives Form 1099-Misc and includes the income reported on Form 1099 as taxable wages in their personal tax return.

So yes...the fees paid to guest speakers (non-employees) are taxable, if they exceed $600.

Question - Are churches/ministries required to provide a Form 1099 to individuals who receive benevolent payments?

Answer: The IRS was asked for a ruling in PLR 9314014 by a nonprofit agency that provided transportation (along with other services) to developmentally disabled persons and other qualified persons that it need not make information returns to recipients of their services. The IRS concluded that the value of the services is excludible from the gross income of the recipients of those services. Because they concluded that the value of the services is excludable from the gross income of the recipients of the services, they further concluded that "the nonprofit agency need not make information returns to them". Information returns being a Form 1099.

IRS letter ruling 200013031 indicates that payments that are "in the nature of general welfare ...are not includible in the recipients gross incomes" and concludes that a 1099 is not required for those type payments.

Publication 3833, issued after September 11. 2001, makes the statement, "In general, individuals who receive assistance in meeting personal needs from a charitable organization are not subject to federal income tax on the value of the assistance." The further conclusion, then, would be that a 1099 is not required.

For payments to be considered benevolence payments and non-taxable, the church or ministry should comply with various recordkeeping requirements. Revenue Ruling #56-304 promulgates that "Adequate records and case histories should be maintained to show the name and address of each recipient, the amount distributed to each, and the purpose for which the aid was given, the manner in which the recipient was selected and the relationship, if any, between the recipient and members, officers, or trustees of the organization, in order that any or all distributions made to individuals can be substantiated upon request by the IRS."

Churches should not file a 1099 with individuals receiving benevolence assistance, however should maintain adequate records and information on individuals receiving the assistance.