Transparency In Ministry

Over the past several weeks we have described the requirements for deducting and recording charitable contributions.

In this post we will discuss calculating the deduction...

The amount of charitable contributions that may be deducted by a taxpayer is limited based on adjusted gross income, the type of property contributed or the nature of the charity.

Limitations:

Deductible contributions made to churches, educational organizations and most other charities are limited based on the donor's adjusted gross income. The type of property contributed (i.e. capital gain property) will determine how much can be deducted by the taxpayor. These limits range from 20% to 50% of the taxpayer's adjusted gross income (AGI).

Excess contributions may be carried over to subsequent filings up to five years, until the excess has been used.

For questions, contact us.

Posted by Kirk Vanderslice

Since the beginning of the year, we have been discussing the general requirements for reporting contributions. In this post we will discuss when to record a contribution.

When is the unconditional transfer considered a contribution? When does the church record a contribution? The timing or delivery of the unconditional transfer is very important in determining how/when to record a contribution.

Let’s review the following:
a. Checks that are mailed to a church are considered “delivered” on the date the donor mails it or the date of postmark.

b. Checks that are delivered in person are considered a contribution at the time of delivery. Checks that are postdated are basically considered to be a promise to pay and should be treated like a promissory note. The church should retain the check until the date and then deposit the funds and record the contribution.

c. Contributions charged on the donor’s bank credit card are recorded in the year the charge is made.

d. If an individual utilizes a pay-by-phone account, the date the financial institution pays the amount is the date of contribution.

e. If stock is donated to the church, the contribution is recognized when the properly endorsed certificate is mailed/delivered to the church or the church’s agent. However, if an individual gives a stock certificate to their agent or to the issuing corporation for transfer to the name of the church, the gift is not completed until the date the stock is transferred on the books of the corporation.

f. If an individual issues a promissory note to a church, it is not a contribution until the payments are made.

g. If an individual makes a contribution with borrowed funds, the contributions are recorded when received, regardless of when the loan is repaid.

h. If a contribution is a conditional gift that depends on a future act or event that may not take place, a contribution cannot be recognized unless there is only a negligible chance that the act or event will not take place.

Here’s an example: Individuals donate cash to a church to help build a new educational wing. The church needs $250,000 to build the wing. The church will refund the contribution if the $250,000 is not raised. The contribution is not recognized until the $250,000 has been raised.

Churches may recognize contributions when received, if the transfer is “unconditional”.

As you can see, it is important to determine when the Church receives the unconditional transfer. See our next post regarding the amount that can be deducted by the donor.

Posted by Floyd Langley & Kirk Vanderslice

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 and Becky DaVee

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.

Posted by Becky DaVee

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 and Becky DaVee

In order for a contribution to be deductible for income tax purposes, the contribution must meet 6 general requirements. In our previous post we discussed the gift of cash or property. In our post today we will discuss what types of organizations can receive contributions and provide substantiation to the donor in order to deduct the donation for income tax purposes.

Requirement #2 for contributions is that the donation of cash or property must be made to or for the use of a qualified organization.

What is a qualified organization? Section 170 of the Internal Revenue Code defines these organizations, meeting the following definitions:

a corporation, trust or community chest, fund or foundation that is or has been:
>created/organized in the U.S. or U.S. possession; State or District of Columbia

>organized and created exclusively for religious, charitable, scientific, literary or educational purposes, and which

>no part of the net earnings of the organization inure to the benefit of any private shareholder or individual, and

>which is not disqualified for tax exemption under section 501(c)(3) by reason of attempting to influence legislation and which does not intervene in any political campaign on behalf of any candidate for public office.

Contributions are allowed if made to or for the use of a church or other 501(c)(3) organizations.

See our next post relating to a personal benefit received by the donor.

The following was a recent question we received via e-mail and we want to share the common situation with you.

Introduction: Contributions may be the most gracious form of expression that a donor can provide a church/ministry to aid in its vision. Yet, with gracious offerings can come many challenges when attempting to account for the funds. Most ministries solicit contributions through a variety of avenues each offering it’s own set of challenges in how the revenues and expenditures should be treated.

The following example is a scenario that many ministries and churches 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.)

The purchase of the ticket by that individual was recorded by the church accordingly- a portion as a charitable contribution and a portion as not tax-deductible.

Later, the individual was not able to attend the event, and did not request a refund of their ticket purchase.

The church relied on and used $25 of the ticket price to pay for the costs of the event.

How should the $25 be treated? Since the donor didn’t show up, is this a contribution?

What if the cost of the meal is $25 and the church/ministry spends an additional $10 per person in advertising the event?

Is this a $125, $100, or $90 contribution? See post #2 for the answer.

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.

On November 29, 2007 NACBA and Your Church(Christianity Today) is sponsoring a webinar relating to the tax and financial reporting requirements for contributions. The webinar lasts an hour, with a 45 minute audio/video lecture and then a 15 minute question and answer period.

For more information, go the registration website and consider signing up for this webinar.

All you ever wanted to know about contributions!

Scenario: A church has determined that additional space is needed for a satellite location. A warehouse has been located, however significant renovations will be needed. A private individual (taxpayer) is willing to purchase the land and building and the church will finance the renovations. The church will rent the facility for three years and the rent will be $1 per year. In three years the taxpayer would donate the property to the church and receive a charitable deduction.

Question: Does the donor receive a deduction for the appraised value of the donated property?

Answer: The IRS has ruled in a technical advice memorandum (9639009 dated 9/27/96) that a donor may not take a charitable contribution deduction equal to the full fair market value of real property leased to and renovated by a charity and later donated to the charity. The taxpayer’s deduction is limited to the fair market value of the property at the time of the donation excluding the renovations. The taxpayer never owned the renovations for tax purposes.

Any questions? Contact us.

Contributions represent the largest source of income for most charitable organizations. Churches are classified as a charitable organization, or a 501(c)(3) and they are funded almost entirely by contributions. Understanding the rules for contributions and developing procedures to comply with the technical legal rules is important.

A contribution can be defined as an unconditional transfer of cash or other assets. The donor does not receive a benefit in exchange for the item transferred. In accordance with section 170 of the tax code (also see Publication 526 for additional information) and in a excerpt provided by Church and Clergy Tax Guide - 2007 - a charitable contribution generally must satisfy the following 6 requirements:

1. Represented by a gift of cash or property. An individual cannot take an itemized deduction (Form 1040, schedule A) for donated services.

2. The contribution should be claimed in the year in which the contribution was made, (i.e., delivered). One exception is allowed for a check mailed to a charity – deductible in the year the check is mailed and postmarked.

3. The contribution has to be unconditional and of no personal benefit.

4. The contribution should be made to and for the use of a qualified charity.

5. The contribution should be within the allowable legal limit (relates to deductibility for the individual.)

6. The contribution must be properly substantiated, (i.e., verified).

We will talk more about each of these requirements in subsequent posts.

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.

Starting in 2007, small cash donations will absolutely need some paperwork behind them, or no charitable deduction is allowed. What does this mean?? According to Accounting Today, vol. 20 no. 17, September 18 – October 1, 2006 edition,

donors of charitable contributions of cash, checks or other monetary gifts must maintain either a bank record (bank statement), letter or other written communication from the donee indicating the name of the donee organization, the date that the contribution was made and the amount of the contribution.

Under IRS Reg. Paragraph 1.170A-13(a), the same rules remain the same…however the new requirements codify what has been a burden of proof requirement and bring it forward to a requirement for taking the deduction.

The new paper Deal! More trees...

Effective for donations made after August 17, 2006, deductions for charitable contributions of clothing or household items are limited to items in good used condition or better. According to Accounting Today, vol. 20 no. 17, September 18 – October 1, 2006 edition,

the IRS may deny charitable deductions for clothing or household items of minimal value. Exception…only for single items if the claims deduction exceeds $500 in value and a qualified appraisal is included with the tax return. While the new tax law requires that the donations meet the “good or better condition” standards, there is no guidance on what value should be placed on those permitted contributions.

What a deal...more paperwork and validation!

According to recent tax law changes and

Accounting Today, vol. 20 no. 17, September 18 – October 1, 2006 edition,

What a deal!

TAX Basis for donor/donee:
The IRS, in Rev. Rule 2002-67 (addressing the fair market value of a donated auto for charitable deduction purposes) states:

One method of determining fair market value of a single donated car is by reference to an established used car pricing guide. However, a used car pricing guide establishes fair market value only if the guide lists the sales price for a car that is in the same make, model, and year, sold in the same area, and in the same condition, as the donated car.

The IRS, in Publication 17, (addressing the determination of value of an auto for casualty loss deduction purposes) says (paraphrased): Books (referred to blue books) issued by various automobile organizations are useful in figuring the value of an automobile. Taxpayers can use the retail value listed in the book for a car and modify that value by such factors as mileage and the condition of the car. The prices aren't official but suggest relative prices for comparison with current sales and offerings in the taxpayer's area.
And finally, Regulation 1.61-21(d)(5)(ii)(A) (addressing the determination of value of an automobile for personal use compensation purposes) says: A lease automobile being valued pursuant to....this section may be determined by reference to the retail value of such automobile as reported by a nationally recognized pricing source that regularly reports new and used automobile retail values, whichever is applicable. That retail value must be reasonable with respect to the auto being valued. Pricing sources consist of publications and electronic data bases.
It is clear from the above that the IRS does recognize and even encourages using a source such as the Kelly Blue Book value for purposes of determining the fair market value of an automobile as long as appropriate adjustments are made because of, for instance, options and miles on the car.

GAAP Reporting: Donated assets are recorded based on the estimated fair value of the property. Retaining documentation of the values obtained from sources, as indicated above, will maintain the “audit trail”.