Transparency In Ministry

In our two previous posts we have discussed several filing requirements for tax exempt organizations. Here are several filings due this Spring...

May 15, 2008: Tax-exempt organizations (ministries as opposed to churches) must file an annual information return. Original due date for 990 and 990-EZ for tax years ending on 12/31/07 is May 15th . (Form 990 and 990-EZ Return of Organization Exempt From Income Tax and Short Form Return of Organization Exempt From Income Tax, respectively) are due for a number of tax-exempt organizations, however do not apply to churches, their integrated auxiliaries, and conventions or associations of churches.

Gross receipts and total assets determine which report is filed.

Also, new for 2008, tax-exempt organizations (excluding churches) that have annual gross receipts less than $25,000 but may be required to file the annual electronic notice (e-Postcard) Form 990-N, see our recent blog posts addressing this new form. (PS - The IRS is still developing an electronic filing system for the 990-N “e-postcard”, and will publicize the filing procedures when the system is completed and ready for use. The Pension Protection Act requires the IRS to revoke the tax-exempt status of any organizations that fails to meet its filing requirement for three consecutive years).

This is also the payment deadline for any 990-T (taxes which are due for calendar year 2007). An automatic extension of three months is available for those who cannot gather their information in time to file by May 15th (automatic 6-month filing extension for 990-T). Please file your extension, or request that your CPA do so. Late filing penalties will begin to accrue if you snooze!

If you have any questions, contact us.

Posted by Laurie Gnad

In this series of posts, we have discussed our churches and ministries can prepare for year-end reporting. In our previous post, we discussed reconciling and closing property, plant and equipment (PP&E) accounts at year-end.

In this post we will determine the characteristics of an operating lease and a capital lease. This will assist you in making sure that all capital lease items are posted as an asset and a liability for the funds owed concerning the lease. See Exhibit D for assistance, too.

Financial Accounting Standards Board (FASB) Statement 13 provides the definitions and criteria for deciding whether or not a lease agreement is to be considered a purchase/sale agreement (and, therefore, a capital lease) or a usage agreement (and, therefore, an operating lease). The distinction between capital and operating leases has important financial consequences: it determines who (lessor or lessee) has ownership rights and who takes depreciation for the leased goods, who can treat lease costs as expenses, and other factors.

For proper explanation of FASB 13 criteria and usage, consult a leasing guide or financial textbook. Very briefly, FASB 13 states that a lease will be considered an operating lease (usage agreement) unless one or more of the following four criteria are met. If any of the following applies, the lease is then treated as a capital lease (purchase/sale agreement):

> The lease automatically transfers ownership of the property to the lessee by the end of the lease.

> The lease contains a bargain purchase option.

> The lease term equals 75% or more of the estimated economic life of the property.

> The present value of the minimum lease payments at the beginning of the lease term equals or exceeds 90% of the fair market value of the property.

In our next post, we will conclude this series by addressing how to record and reconcile prepaid expenses and unrecorded liabilities for entities that report information on the accrual basis.

Posted by Michelle Francis

According to the Tax Guide for Churches and Religious Organizations, the IRS may conduct civil tax inquiries and examinations of churches under IRC section 7611. The IRS may only initiate a church tax inquiry if the Director, Exempt Organizations, Examinations, reasonably believes based on written statements of the facts and circumstances, that the Church:

1. may not qualify for the exemption; or
2. may not be paying tax on an unrelated business or other taxable activity

In November 2007, the Senate Finance Committee issued a letter of inquiry to six prominent televangelists asking for a number of specialized documents and reports relating to board governance, compensation and ministry operations.

Based on various news releases, four of these evangelists are responding or are committed to respond to Senator’s Grassley’s inquiries. Senators Grassley and Baucus have defended their positions on “why” they would like to evaluate this information.

However, under the Tax Guide for Churches and Religious Organizations, the IRC section 7611 provides examples of how/when an inquiry are appropriate.

Is it appropriate for the Senate Finance Committee to solicit selected information from the televangelists and churches?

Post your comment.

Several religious organizations have created integrated auxiliaries. What are these entitites? How should the information be reported?

According to Publication 1828, Tax Guide for Churches and Religious Organizations an integrated auxiliary of a church refers to a class of organizations that are related to a church or convention or association of churches, but are not such organizations themselves.

In general, the IRS will treat an organization that meets the following three requirements as an integrated auxiliary of a church. The organization must:

** Be described both as an Internal Revenue Code section 501(c)(3) organization and be a public charity under Code section 509(a)(1), (2), or (3),

**Be affiliated with a church or convention or association of churches, and

**Receive financial support primarily from internal church sources as opposed to public or governmental sources.

Men's and women's organizations, seminaries, mission societies, and youth groups that satisfy the first two requirements above are considered integrated auxiliaries whether or not they meet the internal support requirement.

So how does a church report an integrated auxiliary? See post #2...

In our previous posts we have discussed several of the new auditing standards that auditors are required to perform for audits with financial statements ending after December 16, 2007. Basically this impacts financial statement audits for years ending December 31, 2007. In this post, we will update you on Statements of Auditing Standard “SAS” # 106 and #107.

SAS 106 – This new standard requires auditors to utilize assertions (i.e. is the account valued correctly? Is this the complete population? Does the client have rights to that asset?), assigned to each account to assess risk and design audit programs. While this step will require additional work in the first year of implementation, it will eventually reduce the amount of testing by eliminating the previously mentioned potential of “over” auditing.

SAS 107 – This step goes hand in hand with SAS #106. Auditors will utilize the audit assertions mentioned above and identify the inherent and control risks for each account within each assertion. The statement provides definitions for the following risks:

Inherent risk - defined as the susceptibility of a material misstatement to a particular account assuming there are no related controls.

Control risk - defined as the susceptibility of a material misstatement to a particular account will go undetected by the controls that are in place.

While this probably sounds like gibberish, in layman’s terms the auditor will assess both of the above-mentioned risks for each account (i.e., cash, inventory, fixed assets, etc…), thus dictating the amount of testing that will be done. So if, for example, the auditors determine that an account has a “low” inherent risk and a “low” control risk, a “low” level or amount of audit testing will be performed. However, if inherent risk and/or control risk is assessed at “moderate” or “high”, then more audit testing will be performed.

Watch for our next post as we discuss the implications described by SAS 108-109.

Posted by Anthony Miller

In our two previous posts, we have discussed the different financial statement presentations, GAAP, cash basis and now we will define modified cash basis of reporting.

There must be "substantial support" for reporting under the modified cash basis. Ordinarily, a modification would have substantial support if the method is equivalent to the accrual basis of accounting for the particular item and if the method is not illogical. The modified cash basis is more common than the "pure" cash basis.

Examples include the need to report property and equipment purchased as assets; accumulated depreciation; material amounts of inventory purchased for cash as assets; liabilities arising from the receipt of borrowed cash; and employee withholding taxes not deposited with the IRS.

See our next post that discusses how to disclose these modifications.

Posted by David DuBois

NACBA and S&O are partnering together to provide a regional training seminar in San Antonio. This seminar invites NACBA members and guests (Texas/Louisiana/New Mexico) to attend a 2- day seminar exploring ways that churches and ministries can "Create Accountability". The seminar begins on May 29th with a kick-off luncheon led by Eric Bryan, Executive Pastor of Fellowship Bible Church, Tulsa.

First Baptist Church on the Riverwalk is hosting the seminar and it begins at noon at May 29th.

The following will be covered during the 2-day sessions:

May 29th, (noon - 5:00 p.m.)
Kick-off Luncheon - Eric Bryan - reviewing key concepts from Andy Stanley's book "Visioneering".

Session I - "Create Tone" - leadership
Session II - "Create Transparency" - financial reporting and responsibilities

May 30th, (8:00 a.m. to 12:00)
Session III - "Create Stability" - compensation and benefits
Session IV - "Create Compliance" - regulatory changes/perspectives/focus

Check out NACBA's website and join us.

In our 2 previous posts in the contribution/event series, we have discussed the common scenario of a non-profit solicitating contributions/revenues in exchange for a donor benefit. Donors often receive something in exchange for a contribution. Whether it is a meal, a book, a video, all of these items are treated similarly. Remember the criteria for financial reporting:

What has been communicated to the donor and what is the donor’s intended response?

The Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA) consider these types of items as direct donor benefits. The donor receives a benefit in exchange for the contribution or “event” sponsorship.

The Internal Revenue Service (IRS) refers to this type of contributions as a quid pro quo contribution. The above regulatory agencies have a similar view of how to treat these items, the first two specifically focusing on financial reporting requirements, and the later on tax benefit considerations.

The following is an excerpt from the AICPA’s Not-For-Profit Audit Guide, chapter 13 paragraph 22:
Organizations may report the gross revenues of special events and other fund-raising activities with the cost of direct benefits to donors (for example, meals and facilities rental) displayed either (1) as a line item deducted from the special event revenues or (2) in the same section of the statement of activities as are other programs or supporting services and allocated, if necessary, among those various functions.

Alternatively, the organization could consider revenue from special events and other fund- raising activities as part exchange (for the fair value the participant received) and part contribution (for the excess of the payment over that fair value) and report the two parts separately.

The above guidance by the AICPA is excellent in helping with the financial reporting aspects of this situation. The following are the presentation options discussed above:

Illustration 1
Changes in unrestricted net assets:
Contributions $200
Special event revenue 100
Less: Costs of direct benefits to donors (25)
Net revenues from special events 75

Contributions and net revenues from special events $275

Expenses:
Program 60
Management and general 20
Fund raising 35
Total expenses 115
Increase in unrestricted net assets $160

Illustration 2
Changes in unrestricted net assets:
Revenues:
Contributions $200
Special event revenue 100
Total revenues 300

Expenses:
Program 60
Other program costs relating to
direct donor benefits 25
Management and general 20
Fund raising 35

Total expenses 140

Increase in unrestricted net assets $160

The "net answer" remained the same, just a difference in reporting the expense as "net revenue" or "expense". See post # 4 as we finalize our discussion on these types of contributions.

Posted by Floyd Langley

Under the Internal Revenue Code section 501(c)(3), charitable organizations, including churches and religious organizations, are exempt from federal income taxes and are generally eligible to receive tax-deductible contributions.

What is a church? What are the characteristics of a church?

According to www.dictionary.com **, "church" can be a noun or a verb. As a noun, a church can be defined as:

1. a building for public Christian worship.
2. public worship of God or a religious service in such a building: to attend church regularly.
3. the whole body of Christian believers; Christendom.
4. any division of this body professing the same creed and acknowledging the same ecclesiastical authority; a Christian denomination: the Methodist Church.
5. that part of the whole Christian body, or of a particular denomination, belonging to the same city, country, nation, etc.
6. a body of Christians worshipping in a particular building or constituting one congregation
7. ecclesiastical organization, power, and affairs, as distinguished from the state: separation of church and state;
8. the clergy and religious officials of a Christian denomination.
9. the Christian faith: a return of intellectuals to the church.
10. the Christian Church before the Reformation.
11. the Roman Catholic Church.
12. the clerical profession or calling;
13. a place of public worship of a non-Christian religion.
14. any non-Christian religious society, organization, or congregation: the Jewish church.

Church is classified as verb and can be defined as:

1. to conduct or bring to church, esp. for special services.
2. to subject to church discipline.
3. to perform a church service of thanksgiving

The word “church” has a broad definition and has a universal recognition in our society. Despite a number of references to the word “church”, the tax code provides no definition. A definition that is too narrow or too broad could interfere with the constitutional guaranty of religious freedom or encourage abuse.

However, the IRS has attempted to fill this void by developing a list of 14 criteria that characterize a church. See our next post, as we discuss these characteristics.

** - obtained from Dictionary.com, unabridged version 1.1. Based on the Random House Unabridged Dictionary, © Random House, Inc. 2006.