Transparency In Ministry

Churches or ministries that receive a motor vehicle, boat or airplane contribution in excess of $500, should prepare Copy A of Form 1098-C. The form should be retained and filed with the IRS by February 28, 2008 along with a 1096 transmittal form. The Form 1096 must show the total number and dollar amount of all such 1098C (copy A forms) for the year. Remember, do not combine any of the under $500 donations in the 1098C-copy A totals.

Penalties for failure to provide appropriate documentation to either the donors or the IRS have increased, as have penalties for providing false or fraudulent acknowledgements. All related records must be maintained for at least three years. Be sure your staff is fully aware of these new requirements before accepting any significant non-cash contributions.

You can print copies B, C, and D of Form 1098-C from the IRS Internet website and use these for your recordkeeping, or you may prepare your own acknowledgement forms provided they have all the identical required information. Prior to February 2008, you will need to order the official IRS forms because copy A is a red form and copies of it cannot be scanned into the IRS system. Call us for forms or advice, or call 1-800-829-3676 to request your forms. There are also software and forms providers in the private market.

The current instructions require mailing completed forms 1096 and 1098C (copy A) to Ogden, UT prior to December 31, 2007. Beginning in 2008 you will mail the forms to Kansas City, MO or Austin, TX, depending upon your resident state. Please refer to the Form 1096 Instructions prior to mailing your forms.

Need help...contact us.

Contributions are typically the most significant source of income for a church or ministry. In order to be a deductible expense for a tax payer the contribution must meet six requirements. Our post today will discuss the first requirement:

A contribution may be a donation of money or property. Cash contributions include currency, checks, credit cards, payroll deductions or out-of pocket expenses incurred when providing a service to the church. Property may include stock, inventory, buildings, vehicles, equipment, etc. The amount of the contribution is typically the fair market value of the property at the time of the contribution.

What is the fair market value? Fair value is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell and both having reasonable knowledge of all the relevant facts. Quoted market prices, if available, are the best evidence of the fair value of monetary and nonmonetary assets, including services. If quoted market prices are not available, fair value may be estimated based on quoted market prices for similar assets, independent appraisals, or valuation techniques, such as the present value of estimated future cash flows.

For certain types of property consider the following:
a. Clothing and household items must be in good used condition or better. Household items include furniture, furnishings, electronics, appliances, linens and other similar items. The fair value for these types of donations can be determined based on what buyers would actually pay in a used clothing stores or thrift shops.
b. Qualified vehicles are defined as cars, boats and airplanes. These types of items are generally valued at the fair market value (from a third party publication or electronic data base – such as Kelly Blue Book) or the gross proceeds from the sale of the vehicle – which ever is lower. Donations of boats or airplanes require an appraisal from a third party knowledgeable of these assets. Condition or engine wear is critical in determining the value.
c. Stock is reported at the fair value at the time of the donation. Donor can potentially receive two benefits if the stock represents capital gain property. Capital gain property represents property that is owned for longer than 1 year. If donors contribute these types of stock, not only will they be able to deduct a charitable contribution, but they will also avoid paying a capital gains tax. In order for a contribution to be recognized before year-end, the stock must be “delivered” to the church or transferred to the church’s name by the issuing corporation.

If you have questions about other types of contributions, contact us. For further information, see the IRS publications 526 and 561.

See our next post related to qualified organizations, requirement #2.

The following is a question that we have received from a controller of a large church in the north east.

Question - During the Watch-Night service, Bishop called for a cross-over offering that was taken after 12AM and the envelopes were dated 1/1/08. When is the contribution recorded? 2007 or 2008?

Answer - The contribution is recorded when delivered to the Church. The cross-over offering was delivered after 12AM and therefore should be recognized in 2008.

In late December the IRS issued an updated version of Form 990, the return that charities and other tax-exempt organizations are required to file annually, and provided transition relief so that small exempt organizations will have time to adjust to the new form.

“When we released the redesigned draft form this past June, we said we needed a Form 990 that reflects the way this growing sector operates in the 21st century,” said Steven T. Miller, Commissioner of the IRS’ Tax Exempt and Government Entities division. “The public comments we received in response to our draft form helped us develop a final form consistent with our guiding principles of transparency, compliance and burden minimization.”

The final form released December 20th, retains the redesigned draft’s format of a core form and a series of schedules. In response to public comments, the new core form allows an organization to describe its exempt accomplishments and mission up-front and provides more opportunities throughout the form for the organization to explain its activities.

Other major changes were made to the form’s summary page, governance section, and various schedules, including those relating to executive compensation, related organizations, foreign activities, hospitals, non-cash contributions and tax exempt bonds. A checklist of schedules was also added.

The new form will be used for the 2008 tax year (returns filed in 2009). The IRS plans to release the related instructions in early 2008.

See post #2 for the transition periods for small organizations.

If a church or ministry receives an auto or other vehicle and the claimed value is greater than $500, there are different filing requirements than discussed in the previous post. You still need all the donor and vehicle information listed previously, however the additional documentation is more complicated.

You must certify if any goods or services were provided in exchange for the vehicle and the related value if any. On Form 1098-C, there is a checkbox 6c to certify that the goods and services consisted solely of intangible religious benefits. All form copies (A, B, and C) must be completed.

If you sell, rather than use the vehicle, you must report the date of sale, gross proceeds, and certify the sale was an “arms length transaction to an unrelated party.” The donor’s deductible amount may not exceed the gross proceeds of the sale. Do not check box 7 or your donor will be limited to a $500 donation. Copies B and C must be supplied to the donor within 30 days of the sale.

If there is an intervening use by the church or ministry, or a material improvement to the vehicle prior to the sale, there are additional requirements. If you need help with these forms, please contact us.

Intermediate Sanctions allow the Internal Revenue Service (IRS) to assess excise taxes on excess benefit transactions that occur between a disqualified person and a 501(c)(3) or 501(c)(4) tax-exempt organization, as well as the managers who approve these transactions. A disqualified person is someone who “exercises substantial influence” over the organization, as well as their family members. These excise taxes are not paid by the organization and must be paid by the disqualified person and managers involved in the excess benefit transaction.

How does this apply to a church or ministry? These organizations are classified as a 501(c)(3) entity and therefore must comply with the requirements that affect the tax reporting related to the disqualified persons.

What is an excess benefit transaction? See post #2.

Just when you thought you knew exactly what your auditors needed, the American Institute of Certified Public Accountants decided to change the documentation requirements. The AICPA issued 8 new auditing standards that are designed to:

> improve the quality and effectiveness of an audit. In short, the standards force auditors to develop a more in-depth understanding of the client and its environment (including internal controls)

> provide for a more rigorous assessment of the risk of material misstatement of the financial statements and finally

> improve the link between the assessed risks of misstatement with the nature, timing and extent of the audit procedures performed.

So...what in the world does all this mean? See our next post as we begin discussing the new standards.