NOVEMBER. resource of the month. and EMPLOYER - CHURCH-PROVIDED. Gifts WHEN ARE THEY TAXABLE NCLL NATIONAL CENTER FOR LIFE AND LIBERTY

Transcription

1 NOVEMBER 2017 resource of the month and EMPLOYER - CHURCH-PROVIDED Gifts WHEN ARE THEY TAXABLE NCLL NATIONAL CENTER FOR LIFE AND LIBERTY

2 introduction Many choose Thanksgiving or Christmas as times to show tangible expressions of love and appreciation to family, friends, coworkers, employees, and volunteers. Most of us never give thought to the tax consequences of giving or receiving a gift, and rightfully so. However, under some circumstances, gifts given by employers and in particular churches and other nonprofit ministries may have potential tax ramifications. One such example is when a church or other nonprofit ministry gives gifts to its volunteers and employees for birthdays, holidays, or through other means such as love offerings. How these funds or gifts are paid for and distributed will dictate how they should be treated for tax purposes for both the giver and the receiver. The following resource from the National Center for Life and Liberty provides guidelines for churches and other ministries that provide gifts to volunteers or employees during this season of giving so they may do so without fear of incurring tax penalties. NCLL.ORG 02

3 1: MOST SMALL, TANGIBLE (NON- MONETARY) GIFTS ARE NOT CONSIDERED INCOME AND ARE THUS NON-TAXABLE TO THE RECIPIENT. Typically, employers provide gifts to their employees or volunteers either in the form of cash/gift cards or by way of small tangible gifts, such as fruit baskets. With the exception of monetary gifts and gift cards, which are always considered income (see Guideline #2 below), the determination of whether a gift is considered income and thus taxable will depend on whether the gift can be considered a taxable fringe benefit of the person s employment with the ministry. A fringe benefit is any benefit provided by an employer to an employee apart from the employee s stated compensation. As a general rule, traditional fringe benefits must be valued and included in an employee s gross income (and thus taxable) unless the type of benefit is specifically excluded by law. One example of a type of benefit that, by law, does not have to be included as income is the de minimis (minimal) fringe benefit. De minimis benefits (gifts) are small and tangible (nonmonetary) gifts provided to an employee from the employer. The IRS defines a de minimis fringe benefit as any property or service the value of which is (after taking into consideration the frequency with which similar fringes are provided...) so small as to make accounting for it unreasonable or administratively impracticable. 1 In other words, de minimis benefits/gifts are those that have such a small monetary value and are given with such infrequency that accounting for them would be impractical. Gifts and events such as the ones listed below fall into this category and may be given by ministries to volunteers and employees without the gift being considered income (and thus not taxable to the recipient): C.F.R (a) 2 26 C.F.R (e)(1) Benefits excludable from income NCLL.ORG 03

4 1: MOST SMALL, TANGIBLE (NON- MONETARY) GIFTS ARE NOT CONSIDERED INCOME AND ARE THUS NON-TAXABLE TO THE RECIPIENT. A TURKEY, HAM, OR GIFT BASKET OCCASIONAL PARTIES, GROUP MEALS, OR PICNICS FOR EMPLOYEES AND GUESTS TRADITIONAL BIRTHDAY OR HOLIDAY GIFTS OF PROPERTY (NOT CASH OR GIFT CARDS) WITH A LOW FAIR MARKET VALUE OCCASIONAL THEATER OR SPORTING EVENT TICKETS (BUT NOT SEASON TICKETS) COFFEE, DOUGHNUTS, AND SOFT DRINKS FLOWERS, FRUIT, BOOKS, OR SIMILAR PROPERTY PROVIDED TO EMPLOYEES UNDER SPECIAL CIRCUMSTANCES (E.G., ILLNESS, OUTSTANDING PERFORMANCE, OR FAMILY CRISIS) The following types of gifts are examples of traditional fringe benefits that the IRS considers additional income to the recipient and would be taxable to the recipient: 3 SEASON TICKETS TO SPORTING OR THEATRICAL EVENTS THE KEY IS SEASON TICKETS; OCCASIONAL GIFTS OF TICKETS ARE CONSIDERED DE MINIMIS FRINGE BENEFITS AND ARE NON-TAXABLE MEMBERSHIP IN A PRIVATE COUNTRY CLUB OR ATHLETIC FACILITY (NOT ONE LOCATED ON THE PROPERTY OF THE TAX-EXEMPT ORGANIZATION) USE OF EMPLOYER-OWNED OR LEASED FACILITIES (I.E., AN APARTMENT, HUNTING LODGE, BOAT, ETC.) FOR A WEEKEND C.F.R (e)(2) Benefits not excludable as de minimis fringes 4 For example, a gift to stay at a church retreat center would be taxable for the dollar value of using that facility; if the fair market value of a nightly stay at the retreat center is $ and an employee s family stayed three nights, the taxable value of staying at the center would be $ NCLL.ORG 04

5 2: CASH OR CASH-EQUIVALENT GIFTS FROM EMPLOYERS ARE ALWAYS TAXABLE TO THE RECIPIENT. When a pastor hands a volunteer or employee a gift card as a thank you on behalf of the church, the recipient may not think of that gift card as income; however, cash or cash equivalents (defined below) are taxable income and are thus subject to federal income tax and Social Security tax. 5 Examples of cash or cash equivalent gifts include: ACTUAL CASH OR CHECK (NO MATTER HOW SMALL THE AMOUNT) A GIFT CARD (NO MATTER HOW SMALL THE AMOUNT) REDEEMABLE GIFT CERTIFICATE (OF ANY KIND) MONEY OR A GIFT CERTIFICATE TO PURCHASE A SPECIFIC ITEM (EVEN IF GIVING THE ITEM ITSELF WOULD OTHERWISE HAVE BEEN TAX-FREE TO THE RECIPIENT SEE GUIDELINE #2 BELOW) 6 When the ministry provides cash or cash-equivalent gifts to employees who have their income taxes withheld by the ministry, the ministry should add the value of the gifts to the employees income and then withhold federal income and FICA taxes on the added income. If the recipients are non-employee volunteers, they are responsible for independently paying the federal income tax and Social Security tax on the gifts. If the ministry gives cash or a cash equivalent of $ or more to a volunteer or independent contractor, the ministry must issue that person a form 1099-MISC for the amount of the gift and then report the issuance of the 1099-MISC to the IRS Code of Federal Regulation (c) 6 The IRS has ruled that an award of a $35 gift certificate, which could be redeemed at a grocery store to buy a ham or a turkey, was to be treated as taxable income because it had the equivalence of cash. Giving an actual ham or turkey, however, could be given tax-free to the recipient. IRS Technical Advice Memorandum NCLL.ORG 05

6 3: THE TOTAL VALUE OF BENEFITS OR GIFTS THAT VOLUNTEERS RECEIVE FROM THE ORGANIZATION MUST BE SUBSTANTIALLY LESS THAN THE TOTAL VALUE OF THE SERVICES THEY PROVIDE TO THE ORGANIZATION. As a condition of their tax-exempt status, 501(c)(3) organizations are required to avoid what s called private inurement : using funds generated by or raised by the organization for the private benefit of persons closely connected to the organization. In other words, a tax-exempt organization must use its funds to further its taxexempt purposes rather than to profit individual people associated with the organization (other than to provide reasonable compensation to its employees). As an example of Guideline #3, assume that a volunteer donates twenty minutes per week of the year (less than eighteen hours total for the year) to play the piano in church and, as a thank you gift at Christmas, the church gifts the piano player with a watch valued at $3500. Under these circumstances, it is likely that a court would determine that the total value of the fringe benefit, the $3500 watch, far exceeds the total value of the service that was provided to the church. In such a case, the tax-exempt organization is in danger of having engaged in private inurement using its funds to benefit a private person associated with the organization in a manner that is not in furtherance of its exempt purposes. NCLL.ORG 06

7 4: IF LOVE OFFERINGS ARE TAX- DEDUCTIBLE TO THE DONOR, THEY MUST BE INCLUDED AS INCOME FOR THE RECIPIENT. If the church collects a love offering for the pastor at Christmas, his anniversary, or for any other occasion, and the gift is given to the pastor out of funds donated by church members, that monetary gift is taxable income to the pastor and should be reported on his W-2. If, however, an individual church member gives a monetary or equivalent gift to the pastor from money or items that are not first donated to the church, that money or gift is not taxable income to the pastor. However, in that particular scenario, the donor should not receive a receipt from the church for the item or gift because such privately given gifts are not tax deductible to the donor. The bottom line is that someone has to pay the taxes: either the pastor pays the taxes on the gift and the donor gets a receipt that enables him (the donor) to deduct the gift from his income, or the donor is not permitted to deduct the gift from his income but the pastor does not have to pay taxes on the gift. NCLL.ORG 07