Missio Nexus - Missions Finance and Accounting Boot Camp. Orlando, FL

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1 Missio Nexus - Missions Finance and Accounting Boot Camp Orlando, FL Dave Meldrum-Green Tim Sims September 20, 2018

2 Introductions

3 Missions Finance & Accounting Boot Camp Workshop Description and Objective: Facilitate open dialogue on best practices impacting finances and accounting for mission organizations working locally and overseas We encourage questions and examples! We don t have all the answers but can follow up as needed We have exhibits/sample policies available if you want them ed to you

4 Agenda Discussion topics: Deputized fundraising Working in foreign countries Ways of doing business overseas Transferring funds overseas Grants Treatment of missionary benefits

5 Agenda (continued) Discussion topics: Budgeting for missionary support Foreign compliance considerations Tax Reform implications Parsonages Intellectual Property Adopting proper policies

6 Other Hot Topics? Brainstorming time

7 Other topics Other possible areas to discuss: Outsources administrative functions Software considerations for accounting and donor tracking KPI and dashboard reporting Security measures IT Responding to emergency situations

8 Deputized Fundraising History of GCM s IRS battle against deputized fundraising Tension between ECFA requirement to honor donor intent and IRS requirement to have full control of donated funds and discretion as to the use of the funds. IRS Main Points of Full Control & Discretion of Use: Control through budgetary process Governing body consistently establishes, reviews, monitors the programs and policies of organization. Staff salaries set by organization according to schedule approved by board

9 More IRS Controls Salaries are not set by the amount of money a fundraiser collects. No commitments that contributions will be paid as salary/expenses to a particular person. Reimbursements of ministry expenses approved according to guidelines approved by board. And not set by the amount of money a fundraiser collects. Thorough screening of potential staff members based on qualifications set by organization related to its exempt purpose. And not principally related to amount of funds that may be raised by staff.

10 More IRS Controls Meaningful training, development and supervision of staff members. Staff assigned to programs and locations based upon staff s skills, training, and specific needs of organization. Financial policies and practices of the organization annually reviewed by audit committee, with majority of members that are not employees.

11 More IRS Controls Regular communication to donors of organization s full control and discretion over all its programs and funds. Through newsletters, solicitation literature, donor receipts, etc. Sample Statement: [Name of Org] is a 501(c)(3) Non-profit organization and will always attempt to honor donor gifts preferenced to support the work of particular missionaries or projects. In accordance with IRS requirements, all donated funds are subject to [Name of Org] full control and discretion.

12 Other Thoughts on Deputized Fundraising The ministry support account is NOT the missionary s bank account Teach and train your missionaries on proper wording: The account for which I m responsible vs. my support account Raising support for [Name of Org] vs. raising my financial support I need to raise up a ministry team for [Org] vs. please support me Issue of cash gifts given directly to missionary vs. gift cards Monitoring the communications and solicitations of missionaries

13 Ways of Doing Business in Foreign Countries Branch Office The U.S. charity registers to do business in the country as a branch office but a separate legal entity is not established Controlled Entity The U.S. charity creates a separate corporate entity recognized in the foreign country and they legally control it. This entity is consolidated in their financial statements.

14 Ways of Doing Business in Foreign Countries (continued) Affiliated Entity/Partner A separate foreign entity is established or engaged with which the U.S. charity affiliates through a written affiliation agreement Typically the U.S. charity does not control/consolidate this entity and funds via periodic grants

15 Ways of Doing Business in Foreign Countries (continued) Business as Mission Establishing a taxable entity in a foreign country. Ownership of this entity may be by the charity, employees, or by local individuals Risks related to actual ownership of assets, potential liabilities Compliance with local regulations and taxes Other methods??

16 Ways to Transfer Funds to Foreign Locations International banks Global B2B payment provider Western Union Use of personal accounts ATMs Credit cards Carrying in cash (with the general $10,000 limit)

17 Grants - Honoring Donor Intent Generally, the obligation to honor donor intent is driven by US GAAP and not given as high a significance by international standards The exception would be if funding comes from a foreign government or agency or foundation that has very specific reporting requirements

18 Grants - Honoring Donor Intent (continued) We have several examples of grant agreements that we can provide for you to modify for your use It is important that you require a periodic reporting back on the program accomplishments or outcomes that have been achieved by the funding Consider adding a clause in the grant agreement that you have the right to request additional supporting documentation to substantiate the expenditures. For significant grants, also the right to conduct an audit of the program

19 Grants - Honoring Donor Intent (continued) Disbursing the funds overseas does not relieve the 501(c)3 entity of the fiduciary responsibility to ensure that donor intent is met This applies also to GIK as there has been increased scrutiny of level of control exercised, accomplishing missional purpose and valuation by regulatory bodies If the foreign entity/recipient is consolidated, then supporting documentation for the related program expenses should be obtained and reviewed for adequacy of releasing the donor intent

20 Grants - Honoring Donor Intent (continued) If the disbursement is to an unconsolidated foreign entity, then the following should be considered: Budget for the expenditure and have underlying support that the related program in the foreign country is accomplishing the mission of the U.S. 501(c)3 entity If possible, fund the foreign entity program with unrestricted funds too Have a formal grant agreement (can use a dollar threshold for practical purposes)

21 Grants - Honoring Donor Intent (continued) If foreign expenditures make up a significant part of your annual budget, it is highly recommended that you develop an internal audit function where you verify that the foreign entity is complying with basic controls and procedures. This can be done by a U.S. employee or even a peer review by another foreign country close by. If this is not in place, the external auditor may need to conduct their own procedures based on their risk assessment.

22 Missionary benefits from organization Health benefits: ACA Employer Mandate for 50 FT employees or more Fully funded plan vs. self-funded plan Plan benefit levels Employees buy up to more expensive plan (missionary vs. office staff) Who must have your insurance (who is FT Equivalent?) Employees who want their own insurance plan Christian medishare plans

23 Missionary benefits from organization Retirement benefits 401k Plans 403b Plans Employer matching Automatic annual employee contribution increases Automatic enrollment to increase participation Taking housing allowance from a 401k/403b plan during retirement Raising awareness of the need to save for retirement What to do about ministers who have opted out of Social Security.

24 Missionary benefits from organization Other benefits to consider: Dental insurance Vision benefit Group life insurance Voluntary life insurance Long term disability insurance (usually up to two years) Short term disability insurance (usually up to 90 days) Vacation and sick time vs. general Paid Time Off FICA bonus for those who have opted to remain in Social Security

25 Missionary benefits from organization Reimbursement expenses as taxable benefits Meal Bonus for in-town meals with fellow employees Mobile Phone Bonus Internet Access Bonus 2 nd Phone Line Bonus In-State (Local) Mileage Bonus Computer and Equipment Bonus Laptops, tablets, i-pads, printers, monitors, software, cell phones, music & office equip. Education/Tuition Reimbursement ($5,250 annual max tax-free) Moving Bonus

26 Support Goal Worksheet - Overseas Monthly Salary Rent, food, utilities, transportation, medical, tuition, savings, other, etc. Estimated Monthly Ministry Expenses Estimate of Infrequent Ministry Expenses Totals up to the Support Goal Worksheet needs based

27 Support Goal Worksheet - Overseas

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35 Compliance Considerations Foreign bank accounts FBAR reporting Significant penalties if missed OFAC monitoring Frequency Level of disbursement to go down to

36 Compliance Considerations (continued) Local annual/periodic charity/corporate filings Payroll and employer tax filings Sales tax reporting on purchases (VAT) Other benefit requirements Government healthcare plans Government administered retirement plans

37 Compliance Considerations (continued) Visas/work permits for expats Tax liability and filings for expats Tax treaties Ownership of bank accounts and real estate Restrictions on transfer of funds out of the foreign country Other??

38 Tax Reform: Qualified Transportation Expenses The qualified transportation expense deduction is suspended Nonprofit organizations that provide this benefit must include its value in unrelated business taxable income (Sec. 512(a)(7)) New IRS Publication 15-B states: While you may no longer deduct payments for qualified transportation benefits, the fringe benefit exclusion rules still apply and the payments may be excluded from your employee s wages.... no deduction is allowed for qualified transportation benefits (whether provided directly by you, through a bona fide reimbursement arrangement, or through a compensation reduction agreement) incurred or paid after December 31, This will affect organizations in urban areas that provide their employees with transit passes or commuter transportation benefits

39 Tax Reform: Qualified Parking Nonprofit organizations that provide a qualified parking benefit must now include the value of this benefit in UBTI IRC Section 132(f)(5)(C): Qualified parking. The term qualified parking means parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work by transportation described in subparagraph A, in a commuter highway vehicle, or by carpool. Such term shall not include any parking on or near property used by the employee for residential purposes. Secs

40 Tax Reform: New Tax Rates Married Individuals Filing a Joint Return and Surviving Spouses If taxable income is: The tax is: Over: But not over: Plus Of the excess over: $0 $19,050 $0 10% $0 $19,050 $77,400 $1,905 12% $19,050 $77,400 $165,000 $8,907 22% $77,400 $165,000 $315,000 $28,179 24% $165,000 $315,000 $400,000 $64,179 32% $315,000 $400,000 $600,000 $91,379 35% $400,000 $600,000 $161,379 37% $600,000

41 Tax Reform: New Tax Rates Heads of Household If taxable income is: The tax is: Over: But not over: Plus Of the excess over: $0 $13,600 $0 10% $0 $13,600 $51,800 $1,360 12% $13,600 $51,800 $82,500 $5,944 22% $51,800 $82,500 $157,500 $12,698 24% $82,500 $157,500 $200,000 $30,698 32% $157,500 $200,000 $500,000 $44,298 35% $200,000 $500,000 $149,298 37% $500,000

42 Tax Reform: New Tax Rates Single Persons If taxable income is: The tax is: Over: But not over: Plus Of the excess over: $0 $9,525 $ % $0 $9,525 $38,700 $ % $9,525 $38,700 $82,500 $4, % $38,700 $82,500 $157,500 $14, % $82,500 $157,500 $200,000 $32, % $157,500 $200,000 $500,000 $45, % $200,000 $500,000 $150, % $500,000

43 Tax Reform: New Tax Rates Married Persons Filing a Separate Return If taxable income is: The tax is: Over: But not over: Plus Of the excess over: $0 $9,525 $ % $0 $9,525 $38,700 $ % $9,525 $38,700 $82,500 $4, % $38,700 $82,500 $157,500 $14, % $82,500 $157,500 $200,000 $32, % $157,500 $200,000 $300,000 $45, % $200,000 $300,000 $80, % $300,000

44 Tax Reform: Increase in the Standard Deduction For tax years 2018 through 2025, the standard deduction is increased as follows: * Married Filing Jointly and Surviving Spouse $12,700 $24,000 Single $6,350 $12,000 Head of Household $9,350 $18,000 Married Filing Separately $6,350 $12,000 *This amount is indexed for inflation for years after 2018.

45 Tax Reform: Personal Exemption Suspended For tax years 2018 through 2025, the deduction for the personal exemption is suspended. For 2018, the personal exemption was set to increase to $4,150. (Rev. Proc ) Sec

46 Tax Reform: Increase in Child Tax Credit For tax years 2018 through 2025, the child tax credit is increased from $1,000 to $2,000. Up to $1,400 of the credit is refundable. This credit is allowed for children aged 16 and under. For married taxpayers filing a joint return whose modified adjusted gross income (MAGI) exceeds $400,000 and for all other taxpayers whose MAGI exceeds $200,000, the credit is phased out. The credit is fully phased out once a taxpayer s MAGI is $40,000 more than the threshold amount. A partial credit of $500 is allowed for dependents other than qualifying children.

47 Tax Reform: Impact on Itemized Deductions Three itemized deductions were retained in modified form Charitable Contribution Deduction Mortgage Interest Deduction State and Local Tax Deduction Medical Expense Deduction retained temporarily Other itemized deductions suspended through 2025

48 Tax Reform: Charitable Contribution Deduction Charitable contribution deduction preserved For tax years 2018 through 2015, the percentage limitation applicable to cash contributions is increased from 50% to 60% of the taxpayer s adjusted gross income Sec

49 Tax Reform: Mortgage Interest Deduction Mortgage interest deduction for acquisition indebtedness is preserved in slightly modified form Acquisition indebtedness is limited to the first $750,000 of a mortgage loan entered into after December 15, 2017 (the previous limit was $1,000,000) The deduction from home equity indebtedness is repealed

50 Tax Reform: State and Local Tax Deduction For tax years 2018 through 2025, a taxpayer may deduct up to $10,000 of state and local income taxes, sales taxes, and property taxes. There is no change in this amount for single individuals versus married individuals filing a joint return. Example: In 2018, John and Sue pay $8,000 in state and local income taxes, $4,000 in property taxes for their residence, and $500 in tangible personal property taxes for their automobiles. This amount totals $12,500. Of this amount, John and Sue can deduct $10,000. The $2,500 excess is forfeited.

51 Tax Reform: Medical Expense Deduction The itemized deduction for medical expenses is preserved through 2018 For tax years 2013 to 2018, the adjusted gross income floor is reduced from 10% to 7.5% in the following situations: Retroactively for tax years 2013 through 2016 where a taxpayer or the taxpayer s spouse attained age 65 before the end of the tax year; and For 2017 and 2018, for all taxpayers For older taxpayers, this will necessitate an amended return For tax year 2018, the itemized medical deduction is not a preference item for purposes of the alternative minimum tax Sec

52 Tax Reform: Entertainment Expense Deduction The deduction for entertainment expenses under Sec. 274 is repealed This does not appear to make the payment or reimbursement of such expenses incurred by an employee of a nonprofit organization as an ordinary and necessary business expense taxable to the employee Unlike other provisions (e.g., payment or reimbursement of qualified transportation expenses), payment or reimbursement of entertainment expenses is not UBTI to the organization Unlike the requirement that moving expenses paid by the employer be included in the taxable income of the employee, there is not comparable provision for entertainment expenses This provision does not appear to apply to meals that are not otherwise part of an entertainment activity Sec

53 Tax Reform: Moving Expense Deductions Suspended Sections and of the new law suspend the exclusion from income tax for qualified moving expense reimbursements AND the deduction for moving expenses under Sec. 217 through December 31, 2025 (except in the case of a member of the Armed Forces of the United States on active duty who moves pursuant to a military). This change doesn t prohibit employers from paying moving expenses, but it does make such payments taxable to the employee. The change clearly covers the cost of moving household furnishings and the transportation costs of children and nonemployee spouses. Transportation cost of an employee should remain payable as an ordinary and necessary business expense.

54 Dealing With Parsonages All ministers that are ordained, licensed or commissioned are eligible for a monthly parsonage (housing allowance) if they work for a: Church Church denomination or convention Association of churches Integrated auxiliary of a church or association of churches It is the responsibility of the employer to determine if someone qualifies as a minister and therefore a housing allowance. Review the documentation for correct wording Ministers doing administration work

55 Parsonages Approving the housing allowance Minister first submits a request within IRS guidelines Estimated annual expenses of owning a home Not more than the Fair Rental Value (FRV) of the home

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57 Fair Rental Value The FRV is simply what it would cost to rent your home or a similar type home in your immediate neighborhood or community (comparably furnished, including utilities). Helpful Tip: One method to possibly consider in establishing an amount for the fair rental value of your home is to request a local realtor to estimate the rental value in writing of the furnished home. Place the estimate in your tax file and annually adjust the value for inflation or other local real estate valuation factors. Then maybe every 3-4 years, obtain a new written estimate from a local realtor for your files. Remember, the determination and defense of the FRV is completely 100% the responsibility of the minister, not Reliant Mission. When the proposed parsonage requested amount exceeds the Fair Rental Value, Reliant will use the Fair Rental Value amount.

58 Parsonages Approvals Board level Management level It can be amended mid-year Can only be approved prospectively

59 Parsonages May be reported on W-2 Box 14 (Other) Exempt from Federal Income Tax but NOT Social Security (SECA) Generally exempt from state income tax Can still be taken during retirement as tax-free distributions from a church sponsored 403(b) or 401(k) Plan Once the approved parsonage is paid out, it is the minister s responsibility to substantiate it before the IRS. If they incur excess parsonage, they need to record it as income on their Form 1040.

60 Challenge to the parsonage The U.S. Treasury Department is appealing the decision to the 7th U.S. Circuit Court of Appeals in Chicago. Judge Crabb stayed the decision pending the outcome of the appeal. If the 7th Circuit lets the ruling stand, then it could become precedent for courts in Wisconsin, Illinois and Indiana. It could become a national precedent if the IRS chooses to apply the decision nationwide to promote consistency in tax law. An unfavorable action by the 7th Circuit would most likely be appealed in the Supreme Court.

61 Intellectual Property - Basics Your organization is tax-exempt organization under Section 501(c) (3) of the Internal Revenue Code, and as such, may only expend its resources for the advancement of the religious, charitable, and educational purposes for which it is organized. Therefore, it may not legally allow its resources to be used for the personal benefit of any individual, including its employees. And if an intellectual property work is made by an employee it is owned by the organization per U.S. Copyright Law. Allowing the employee to simply automatically own this work would be a personal benefit, and a violation of Copyright Law.

62 Intellectual Property Examples of works produced by religious organization employees: Sermons, teachings, or other oral presentations Notes or study materials generated in conjunction with above Worship songs music and lyrics Seminars or workshops Blog posts, websites, software, or other digital media Books, newsletters, Bible studies or other literary works Works of art and design

63 Intellectual Property Works produced outside scope of employment Independent Can be owned by the employee Must be created on employee s personal time Employee cannot use any of the resources of the organization Should be presented in advance and approved in concept by organization Cannot be advertised or promoted using organization s resources Written agreement should be prepared and signed by both parties

64 Intellectual Property Treatment of organization work if employee leaves organization Organization could donate the work to another 501c3 organization or church Organization could transfer ownership directly to the employee Obtain a fair market value for the work to be transferred This now becomes the purchase price Payment can be made to the organization by: Add the purchase price to the employee s taxable compensation and list it on their W-2 The employee pays the organization directly Organization should have a clear IP Policy that spells all of this out

65 List of Sample Policies and Templates Account reimbursement plan policy Disaster recovery plan Gift acceptance policy Grant making policy Record retention policy Whistleblower policy IRS letter Control of Donated Funds Parsonage request form Intellectual Property Policy

66 Contact Details Dave Meldrum-Green, CPA Director of Organizational Affairs & Treasurer Reliant Mission x 134 Tim Sims, CPA Partner Capin Crouse LLP tsims@capincrouse.com