Transparency In Ministry

In our series of ordinary and necessary expenses, churches and ministries should document lodging and certain incidental expenses (such as cab fares) by receipt and/or other contemporaneous records that include the business purpose of the trip.

If proper documentation is not received by the church/ministry for expenses paid by the church/ministry on the behalf of an individual, the IRS would deem those expenses paid by the ministry as income to the person that incurred the expense. If the ministry does not identify those expenditures without proper documentation and either demands repayment or classifies them as compensation to the individual, the transaction becomes an “excess benefit transaction” and would be subject to an excise tax of from 25% to 200% payable by the individual.

Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting marketing or recommending to another party any transaction or matter addressed herein.

For more information about excess benefit transactions, please contact us.

As noted in our previous post, the AICPA has issued several new auditing standards that are applicable for audits ending after 12/16/07. We will briefly discuss the 8 new standards:

SAS 104 – More clearly defines the level of assurance auditors are to provide the client and interested 3rd parties regarding whether or not the client’s financial statements are free of material misstatement. This has not direct client impact.

SAS 105 – Expands the scope of the understanding that the auditor must obtain of the client’s internal control. The auditor will likely attempt to identify key revenue and expense ‘streams’ and walkthrough the client’s process of collecting those revenues and expenses from the transactions inception to it being booked in the general ledger. During those walkthroughs (performed with relevant client employees) the auditor will identify controls currently in place that are “key” to the financial statement reporting process. This understanding will provide auditors evidence that ultimately will support the opinion on the financial statements.

Posted by Anthony Miller

Cash Basis - vs - Modified Cash Basis…What’s the Difference?

Pure cash basis financial presentation is rarely used for businesses. Generally, it is limited to nonbusiness entities with very simple operations. Entities that might use pure cash basis of accounting include school activity funds, fairs, trusts, estates, and political campaigns. Revenues and expenses are recognized based on cash receipts and cash disbursements of cash, hence “cash basis”. It treats all disbursements of cash as an expense. Therefore, the purchase of an asset is recognized as an expense rather than an asset. The balance sheet ends up with only cash and equity and the income statement reflects all cash receipts as revenues and all cash disbursements as expenses.

What is the modified cash basis? See our next post, as we discuss the additional items reflected on the balance sheet.

Posted by David DuBois

In our last post we discussed reconciling cash, investments and the related income and expenditures in our closing procedures.

In our post today, each entity should consider having a capitalization policy for property, plant and equipment, as determined by the Board of Directors or Management. A typical policy could state that all items above $1,500 (amount to be determined by management in accordance with reporting needs of the organization), will need to be capitalized or placed on the balance sheet as a fixed asset, instead of being expensed. Examples of property, plant and equipment (PP&E) would include computers and software, transportation, leasehold improvements, land, furniture and fixtures, computer software and buildings.

Some organizations record all disbursements as expenses; except major land and building purchases. If a capitalization policy exists, the entity may want to review the following accounts to ensure that it does not represents a purchase over $1,500 for any property, plant and equipment.

> Office equipment
> Repairs and maintanance (adds significant value (extension of useful life) to asset)
> Computer supplies and equipment
> Office supplies

These items would be included as your additions to PP&E. Besides additions, most entities should be keeping track of disposed assets each month. Disposed assets may have been discarded, donated or sold. If sold, document the date of sale or date of disposition and proceeds (deposits) from sale. The detail fixed asset list should have the date of original purchase, description of asset and purchase price of the asset that was disposed of. This will help document gain/loss on sale.

In our next post addressing year-end closing procedures, we will discuss the differences between an operating lease and a capital lease. – Stay tuned.

Posted by Michelle Francis

Contributions may be the most gracious form of expression that a donor can provide a Ministry to aid in its Vision. Yet, with gracious offerings can come many challenges when attempting to account for the funds. The following example is a scenario that most any Ministry will encounter:

A donor purchased an event ticket in advance with the understanding (clearly printed on the ticket) that a portion of the ticket price was a charitable contribution to the church, and the remaining portion of the ticket price was for value received, a meal (therefore not tax-deductible). The ticket price was $125 — $100 charitable gift, $25 value of event. ($25 per person was the church's cost to hold the event.)

In post #1 of this series, we asked the question: Is this a $125, $100, or $90 contribution?

This real “church issue” creates numerous individual challenges, providing a great example of how a simple transaction can turn into an advanced course in not-for-profit accounting.
We will deal with these issues individually, so that we can explore the elements in the equation.

First off, the issue to be analyzed in dealing with donor contributions is the understanding of the donor’s interpretation and intent when giving. How and why did the donor give? What did they intend?

Giving is an intimate aspect of being a Christian, and it’s the Church’s fiduciary responsibility to fulfill the donor’s wishes as long as the purpose is in alignment with the organizations “mission” and “exempt purpose”.

In the scenario described previously, the Church is holding a fundraising event where a donor can prepay for a ticket to an event. The donor’s intent was to make both a charitable contribution of $75 and receive a meal valued at $25. Remember, this was indicated on the ticket the donor purchased. So the first part of the equation is easy, the donor intended to contribute $75 so the Church should record a $75 contribution upon receipt, but what about the $25 purchased meal?

Considering the donor could not attend, does this become an additional $25 contribution? Events subsequent to the contribution (donor’s inability to attend the event) do not affect the donor’s intent at the time of the contribution; therefore no further considerations need to be made.

However, how should the $25 be treated by the Church or non-profit organization? See post #3.

Posted by Floyd Langley

Auditors normally provide a list of items that they will need during the course of the audit. This list is usually prepared and delivered to the client during the planning phase of the engagement. These items normally include reconciliations and support for selected transaction throughout the year. Management should take time to prepare these work papers and have all applicable requests completed before the audit begins. This maximizes the auditor’s efficiency and management’s time required during the fieldwork.

Another great idea for management to perform is a review of the balance sheet accounts starting at the current assets and moving down through net assets (equity). This review includes a general ledger detail and reconciliation with relevant third party information. This helps identify differences and or errors that have been recorded during the year. Based on the new auditing standards, specifically SAS 112, any error above a significant amount is reported as a significant deficiency by the auditors. To eliminate unnecessary comments in the auditor’s report, management should consider making sure reconciliations and supporting documentation is completed before the audit.

Do you have questions about the audit? E-mail or call me.

Posted by Kirk Vanderslice

As I filed my annual federal and state income tax returns last week, I remind myself "why" I pay taxes. Personally, I believe I pay more than my "fair share", but that is beside the point of this blog post today.

The Apostle Paul, as recorded in Romans 13, reminds us "WHY" we pay taxes. This scripture is a favorite of mine, especially in light of the political environment that we endure...

This is why you pay taxes, for the authorities are God's servants, who give their full time to governing. Give everyone what you owe him: if you owe taxes, pay taxes, if revenue, then revenue; if respect, then respect; if honor, then honor. The authorities that exist have been established by God. Consequently, he who rebels against the authority is rebelling aginst what God has instituted, and those who do so will bring judgement on themselves. For rulers hold no terror for those who do right, but for those who do wrong. Do you want to be free from fear of the one in authority? Then do what is right and he will commend you. For he is God's servant to do you good. But if you do wrong, be afraid, for he does not bear the sword for nothing.

Therefore, it is necessary to submit to the authorities, not only beauce of possible punishment but also because of conscience. Excerpt from the NIV of Romans 13.

So why do we pay taxes? Why do we submit to authorities? Because of conscience.

Because of my conscience...

According to Dictionary.com a contribution is synomous for a gift, donation, or benefaction. Since a gift does not occur without an irrevocable exchange, a contribution is not considered an allowable deduction unless the contribution is unconditional. The donor receives no personal benefit in exchange for the gift.

IF the donor receives a benefit for the gift, the difference between the gift and the benefit is the amount that is deductible. Here's an example...

Donor Brown contributed $100 to a charitable dinner. The value of the dinner was $50, therefore the amount deductible for the contribution to the charity is $50...($100 contribution less $50 dinner received).

See our next post on contributions relating to timing.