Tax Considerations of Churches

Transcription

1 Tax Considerations of Churches

2 Tax Exempt Status of the Church But I Thought We Were Tax Exempt! (Being tax-exempt isn t the same as being tax-free)

3 Tax Exempt Status of the Church Tax-exempt usually refers to only three things: No federal income taxes due on normal operating activities No sales taxes are due on purchases the church makes No property taxes are due on the land and buildings used in the ministry

4 Federal Tax Exempt Status

5 Federal Income Taxes Churches are automatically exempt from federal income taxes There is no need to file IRS Form 1023 Application for Tax Exemption Can voluntarily file Can file under a denominational group exemption

6 State Sales Taxes

7 State of Texas Sales Taxes Churches are exempt from collecting and remitting sales taxes on PURCHASES However, this exemption does not extend to Sales of goods or services!

8 Local Property Taxes

9 Local Property Taxes No property taxes are due on the land and buildings USED in the ministry

10 Unrelated Business Income

11 Unrelated Business Income Federal income tax exemption only applies to net income from exempt activity Engaging in business ventures may subject the church to unrelated business income taxes

12 Unrelated Business Income Income of a tax-exempt organization is presumed to be exempt from federal income taxes unless generated in an activity: Not substantially related to the organization s exempt purpose That is a trade or business And, is regularly carried on

13 Unrelated Business Income Unrelated business income is permitted as long as it is not a substantial part of the organizations activities Unrelated business income is reported on a form 990T if more than $1,000 is generated in unrelated activities

14 Employee vs. Contractor Determination

15 Employee vs. Contractor Determination The Fact of The Matter This is a common area of noncompliance by churches

16 Employee vs. Contractor Determination Why do Churches choose to be in Noncompliance? They don t know the rules! Non-compliance eases the paperwork burden Avoids social security taxes

17 Employee vs. Contractor Determination What risks should Churches consider? Payroll taxes not paid Church is responsible for 100% of uncollected payroll taxes 100% penalty applied for not collecting and remitting the payroll taxes Intermediate sanctions can be assessed against responsible parties up to $10,000 (Pastor, Bus. Adm., Fin. Comm. Members, etc.)

18 Employee vs. Contractor Determination How do you determine status? IRS Publication 15-A Employer s Supplemental Tax Guide Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are carried out.

19 Employee vs. Contractor Determination How do you determine status? Common law rules: Behavioral Financial control Type of relationship

20 Employee vs. Contractor Determination How do you determine status? Behavioral Instructions the business gives the worker. An employee is generally subject to the business instructions about when, where, and how to work. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. Training the business gives the worker. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.

21 Employee vs. Contractor Determination How do you determine status? Financial Control The extent to which the worker has unreimbursed business expenses. Independent contractors are more likely to have unreimbursed expenses than employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services they perform for their business.

22 Employee vs. Contractor Determination How do you determine status? Financial Control How the business pays the worker. An employee is generally paid by the hour, week, or month. An independent contractor is usually paid by the job. However, it is common in some professions, such as law, to pay independent contractors hourly. The extent to which the worker can realize a profit or incur a loss. An independent contractor can make a profit or loss.

23 Employee vs. Contractor Determination How do you determine status? Type of Relationship Written contracts describing the relationship the parties intended to create. Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay. The permanency of the relationship. If you engage a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that your intent was to create an employer-employee relationship.

24 Employee vs. Contractor Determination How do you determine status? Type of Relationship The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of your regular business activity, it is more likely that you will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney s work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.

25 Charitable Contributions

26 Six Requirements of Charitable Contributions #1 Must be a gift of CASH or PROPERTY Personal Services are NOT deductible

27 Six Requirements of Charitable Contributions #2 Must be claimed as a deduction in year in which the contribution is made Cut-Off is December 31! Can t hold books open! Must be in hand or postmarked by December 31!

28 Six Requirements of Charitable Contributions #3 Must be given unconditionally & without personal benefit No strings attached other than general direction of funds purpose

29 Six Requirements of Charitable Contributions #4 Must be made to or for the use of a qualified charity To a 501(c) (3) organization Not to an individual No earmarking Conduit role does not create deductibility

30 Six Requirements of Charitable Contributions #5 Deduction must be within legal limits Most cases 50% of adjusted gross income

31 Six Requirements of Charitable Contributions #6 Must be properly substantiated Cash gift in excess of $250 must have written acknowledgement with disclaimer Property gift of $250 - $500 must have written acknowledgement with disclaimer Property gift in excess of $5,000 must have written acknowledgement with disclaimer plus Form 8283 and perhaps Form 8282

32 Common Areas of IRS Non-compliance by Churches and Ministries

33 Common Areas of Non-compliance Contractor vs. Employee rules not followed No formal determination of contractor/ employee status 1099 forms not filed for recipients of $600 or more Employees who perform after hours work treated as contractors for the extra work

34 Common Areas of Non-compliance Contribution substantiation No separate acknowledgement of gifts in excess of $250 No statement to the affect that no goods or services were received in exchange for the gift Failure to inform donors of the rules involved with gifts of property in excess of $5,000 in value

35 Common Areas of Other matters Non-compliance Earmarked contributions Failure to consider unrelated business income taxes Failure to file Form 5578, Proof of Racial nondiscrimination Opting out of Social Security without religious opposition to public insurance

36 Tax Considera-ons of Churches Thank You Verne Hargrave MBA, CPA, CFE PSK LLP