Transparency In Ministry

A ministry typically reimburses travel costs incurred by employees performing ministry projects. In order for the Ministry to reimburse these costs, what is the reimbursement period and what is the employee required to do?
In order for a ministry to have an “accountable plan” (plan set up by the employer to pay reimbursements or allowances for travel expenses), an employee must adequately account to the Ministry (employer) for the travel expenses within a reasonable period of time. The safe harbor rule indicates that the accounting to the employer should not be more than 60 days after the expense has been incurred. However, it can also depend on the facts and circumstances related to the travel. A prudent policy is reimbursement within 60 days of the event.
Documentation of actual costs incurred should be evidenced by a receipt and the expense should be properly authorized by the designated member of management.

Periodically, ministries may advance funds to employees to pay for designated expense, including travel. If these advances are not substantiated by the employee and repaid…what are the tax consequences to the employee?
Typically these advances are recorded as employee receivables and when repaid (employee submitting third party documentation of the costs incurred), then the ministry expense is recorded and the employee receivable is reduced as follows:
DR Ministry expense $XX
CR Employee advances $XX

However…if the employee never repays the advance within the reimbursement period, then the “loan” can become taxable income and included on the employees W-2. If the employee advance is determined to be uncollectible the following should be recorded in the general ledger:
DR Salaries $XX
CR Employee advances $XX

The ministry can pay expenses for volunteers on ministry trips, as long as the volunteer performs meaningful and significant service during the trip. Publication 526, "Charitable Contributions" specifically states that if there is no significant element of personal pleasure, recreation, or vacation in the (charitable) travel, the expense of travel on behalf of a charitable organization is deductible (and conversely, if paid for by the organization, not taxable income). The publication also says the deduction for travel expenses will not be denied simply because you enjoy providing services to the charitable organization. Even if you enjoy the trip, you can take a charitable contribution deduction for your travel expenses if you are on duty in a genuine and substantial sense throughout the trip. For more information see Publication 526.

What if the volunteer is a minor?The fact that the volunteer is a minor, should not impact the inclusion of paid-for travel expenses in an individual's income, if it meets the criteria otherwise of having no significant element of personal pleasure. Furthermore, the ministry has the discretion to determine those travel expenses that it will pay without adverse consequences, as long as it meets the above criteria.

Sandy Siegfried
Shareholder

In our two previous posts…we’ve discussed the requirements for “donating” to other ministers and ministries. In this third posting, we will address “gifts” affecting excessive compensation…

Donations or gifts received by “visiting or guest pastors” from a recipient congregation must be included in the estimated salary for a pastor. These special speaking events can accumulate, $10,000 here, $10,000 there. These “gifts” are considered taxable income to the pastor and should be included in the annual compensation analysis of the pastor.

If a pastor receives more than $120,000 - $150,000 a year as compensation, then the board of the church of ministry is responsible for determining if the compensation is reasonable and not excessive as defined by IRS.

Concerned with excessive compensation or taxable “gifts”…e-mail us.

When a pastor performs services for a recipient congregation and the recipient congregation would like to “pay” the guest pastor for those services. The guest pastor has performed “services” consistent with the receipient congregation’s exempt purpose – those services are considered “professional services” and not a donation or contribution or mission expense. The funds received by the guest pastor represents taxable income, reported by a 1099.

The IRS is very particular about “services rendered” and when “services” are performed by individuals in the “line of duty” or in the ordinary course of employment – these “gifts, donations or reimbursements” represent taxable income. No if, ands or buts….

Ministries giving to ministries…can it affect excessive compensation? You betcha! See post #3 coming soon!

A well respected pastor is retiring from his local congregation. Other local community congregations and ministries would like to honor his service by donating to the retiring pastor’s congregation for a retirement gift (cash). Is this an allowable donation from the local pastors, congregations and ministries?

Several points are critical in understanding the IRS’ intent for allowing donations…

1. If a “donor” ministry wants to support a “donee” minister in performing his ministry, it can do so as long as it contributes importantly to the donor-ministry's tax-exempt purpose. However, it will be taxable income to the recipient minister, and a 1099 should be issued.
2. If a “donor” ministry wants to support a “donee” minister or ministry in their exempt purpose and the funds are not restricted as a gift to the minister, the donation will not be taxable income to the recipient minister.

However…the practice of exchanging “gifts” among friendly pastors using ministry funds would be personal inurnment to the recipient pastor and is taxable income, reported by a 1099.
Ministries giving to ministries…when it isn’t a “donation”…coming next. Blogging again soon.

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”.

A pastor purchases selected shirts and pays to have the ministry logo embroidered on the shirts. He wears the ministry shirt in the performance of his duties and the cost is not reimbursed by the church? Is this a legitimate business expense deductible on his tax return?

The fact that church or ministry logo is embroidered on some of the shirts may help in the argument that (at least for those shirts), the suits are not suitable for private and personal wear. In Levitt v. Commissioner, TC Summary Opinion 2001-147, petitioner testified that he was required to purchase and maintain tuxedo shirts with a company logo. The tax court ruled that the petitioner "satisfied the elements under Yeomans v Commissioner (cited in earlier posting), supra; therefore, he is entitled to a deduction for the costs of the .....shirts." In the same case, the Tax Court disallowed the deduction of black shoes required by the employer because they were suitable for general or personal wear. In Risicato v. Commissioner, TC Memo 1984-238, the Tax Court examined whether or not a "jacket with a business identification on it constitute the sort of work clothing that is properly deductible." It concluded that "the purpose of the jacket was to advertise and identify petitioner's business" and concluded that the jacket was deductible.

Answer...yes, it is an allowable business deduction, if not reimbursed by the Church.

A pastor would like double-breasted, black suits for special television events. He did not wear these suits in his private life and he maintained the suits at his residence. The church did not pay for these suits, but the pastor incurred these costs and wants to know if this is a business expense, deductible in his personal tax return?

In Hynes v. Commissioner, 74 TC 1266, the taxpayer-petitioner, a TV newscaster, contended that he was entitled to deduct the expense of his on-the-air wardrobe that he kept at home because he was restricted in his selection of colors and patterns of such clothes and because he did not wear the clothes when he was not at the station on camera. The court did not agree with his contention and observed that "the restriction on the petitioner's selection of his business attire is not significantly different from that applicable to other business people who must limit their selection of business clothes to conservative styles and fashions. The fact that the petitioner chose not to wear his business clothes when he was away from the station does not mean that such clothes were not suitable for his private and personal wear. Indeed, most people do not wear their business clothes at home."

In Gerres v. Commissioner, TC Memo 1986-573, the petitioner was a welder and, as such, purchased fire resistance clothes. The Tax court ruled that the clothing was suitable for general wear and disallowed the deduction, even though the petitioner testified that he only wore the fire resistant clothes at work.

Answer…specialized clothing that is suitable for private/personal wear, maintained at home is not a business expense…other professionals do not get to deduct the costs of the suits worn in the corporate world.

A pastor has special clothing or uniforms that are worn during television broadcasts. The church pays for the clothing or wardrobe and the pastor would like to keep the clothing at home instead of the television studio. Are these uniforms a legitimate expense of the church …and is it permissible to maintain the clothing at the pastor’s home?

The general rule is that the cost of clothing of an employee is deductible (and presumably can be provided tax-free by the employer) if both of the following tests are met:

...if the uniforms are specifically required as a condition of employment, and
...the uniforms aren't of a type adaptable to general or continued usage to the extent they take the place of regular clothing. Revenue Ruling 70-474, 1970-2 CB 34.

The Tax court (Yeomans v. Commissioner, 30 T.C. 757 (need link).applied an additional subjective test, which examines the suitability of the clothing for private or personal wear by the taxpayer seeking the deduction. In other words, the clothing must meet three criteria:

1) The clothing can't be suitable for general or personal wear;
2) It must be required or essential in the taxpayer's employment; and
3) It isn't, in fact, used for general or personal wear.

A case decided in 1966 (Nelson, Oswald, TC Memo 1966-224) allowed an actor to deduct clothing even though it was suitable for general or personal wear. The deciding factor in this case was that the clothes were kept at the studio, and never worn outside of the TV set.

So to answer the above questions..Are uniforms/specialized clothing a legitimate expense?? Yes, if the uniforms used by the pastor are required as a condition of employment. These benefits are provided “tax-free” to the pastor.

Can the uniforms or specialized clothing, not adaptable to general usage be maintained at the pastors personal residence? YES…based on the reasoning provided by the Nelson case. If the pastor takes the suits home, he would have to prove that the suits were not suitable for general or personal wear.

However….(there’s usually one in every case…) While there may an argument that the suits are not suitable for personal wear, the question is a subjective one, and could ultimately be decided by a court that has a difference of opinion than that above. The safest and most prudent course of action is to continue to keep the suits at the studio so that there is no question that the suits are not worn for personal use. And, of course, the issue as to suitability for personal wear remains moot if the suits are left at the studio.

In typical legislative style, the Oklahoma Legislature passed, and then inadvertently repealed, and then promised to pass again, a bill exempting church construction contracts from OK sales tax. Normally, churches are exempt from OK sales tax. However, if a church undertakes a construction project and hires a contractor who purchases the materials, the contractor has to pay sales tax on the materials. The contractor would naturally pass through this tax in his billings under the contract. Oftentimes, a church will arrange with its contractor for the church to pay for materials directly, thereby avoiding the sales tax burden. This can be a cumbersome process. Enter the OK Legislature riding its white horse...

The bill, SB 1084 - the Omnibus Tax Bill, provided a sales tax exemption for "any person with whom a church has duly entered into a construction contract..." What a great idea! However, in its Special Session the Legislature repealed the entire tax bill and forgot to put this exemption back into the final bill. To add to the confusion, the repeal is not effective until June 30, 2007, whereas the original exemption is effective August 25, 2006. What this means is material purchases by the contractor between August 26, 2006 and June 30, 2007 will be exempt from OK sales tax. If the Legislature fixes its mistake, the exemption should continue. If the error is not rectified, the exemption will expire on June 30, 2007.

Recommendation: The prudent course for church construction contracts may be for the church to continue to pay for the building materials directly until the OK Legislature gets its act together. Updated information will be forthcoming as soon as the Legislature moves. For other state filing requirements...We have answers...contact us!