Religious Organization Issues

Transcription

1 Religious Organization Issues

2 Introduction Definition of church Tax-exempt status

3 Payments for Services Employment taxes Required forms Electing out of employment taxes

4 Payments for Services Payments for ministers Self-employment tax exemption

5 Minister s Form W-2 Carol Carter is the pastor for Hilltop Church. In 2011, the church paid her a $28,000 salary. She requested income tax withholding, and the church agreed, so it withheld $7,000 from her pay to cover her income and SE taxes.

6 Does the church have any filing requirements besides Forms W-2 and W-3? YES The church must file Form 941 or 944 to report the income tax withholding.

7 What if the church agrees to pay another $3,700 to help with Pastor Carol s SE tax liability? The money is reported on Form 941 and Form W-2 both as wages and as additional federal income tax withholding. The amount in box 1 of her Form W-2 increases to $31,700 ($28,000 + $3,700).

8 What if Carol Carter is the church secretary instead of the pastor? Unless the church has filed Form 8274, Carol s Form W-2 should show social security and Medicare wages in boxes 3 and 5, respectively, and Carol s share of those taxes in boxes 4 and 6. The church files Form 941 to report all of the withheld taxes and pay its employer share. If the church has filed a Form 8274 and Carol is the secretary, the only change to Carol s Form W-2 is an entry of Form 8274 in box 14.

9 Payments for ministers Self-employment tax exemption Housing allowance

10 Housing Allowance Pastor Carol, from the previous example, also received a housing allowance of $8,500.

11 Does this change her form W-2? YES The housing allowance is reported in box 14.

12 Payments for ministers Self-employment tax exemption Housing allowance Definition of ministers

13 Payments for ministers Self-employment tax exemption Housing allowance Definition of ministers Reimbursements

14 Retirement Plans Types of plans Gifts to retiring ministers Rev. Rul , C.B. 14, which was issued following decisions in four court cases, describes the following characteristics of gifts to retiring clergy:

15 There is no enforceable agreement, established plan, or past practice that requires the payments. The retired minister is not expected to, and does not, perform further services for the congregation. There is a far closer personal relationship between the minister and the congregation than is found in lay employment relationships. The minister was adequately compensated for his or her past services. The amount of the gift is determined by the needs of the retired minister and the financial position of the congregation.

16 Unrelated Business Income Criteria for taxation Exceptions

17 Unrelated Business Income Maintown Synagogue operates a website to keep its members up to date on its activities and to provide information for nonmembers seeking to know more about the synagogue. Part of the financing for the website comes from advertising sold by the synagogue s members, who receive no compensation for making the sales. In 2011, the synagogue s total income from advertising was $3,200.

18 Is the $3,200 unrelated business taxable income? Although selling advertising is an unrelated business activity, the income is not taxable because all of the sales were handled by volunteers.

19 Parking Lots Centerville Church has a large parking lot that the church uses primarily on Sundays. Because the church is located in an urban area, the church elders decided it would make sense to rent parking spaces to individuals working nearby during the week. The church expects to net about $25,000 a year.

20 Will the $25,000 be subject to the UBIT? YES The operation of a parking lot is a business. Parking fees do not qualify as rent [Treas. Reg (b)-1(c)(5)].

21 Is there a way the church can receive income from the parking lot and avoid the UBIT? YES The church can lease the lot to a third party, who operates the parking concession and pays a fixed rent to the church. The fixed rent can be a percentage of the revenue from the lot. That arrangement turns the income into rental income that is exempt for the UBIT.

22 What if the church has a mortgage on the property, including the parking lot? Income from debt-financed property is subject to the UBIT even though the rent would otherwise be excluded from UBIT.

23 What if the church operates the parking lot using unpaid volunteers to staff it? If substantially all of the work is performed by volunteers, the income meets an exception so that it is not unrelated business income. Substantially all is not defined for this purpose, but other areas of exempt-organization tax law refer to an 85% figure. In most cases, the exception to UBIT is met if at least 85% of the work (measured by the number of hours worked) is performed by people who work without remuneration and no more than 15% of the work is performed by people who are compensated. But the IRS can apply the substantially all test in a general manner, rather than mechanically.

24 Benevolence Funds

25 Statements for Donors Required information Quid pro quo donations Disposition of donated property Statements of giving

26 Contemporaneous Acknowledgement Susan Stewart donated $2,500 to her church in Because of complications within the church bookkeeping system, she had not received her statement of giving by the time she filed her return in March 2011, although she had her own records, including images of canceled checks. The church s statement was secured by April 15, 2011.

27 Has she met the contemporaneous acknowledgement requirement? If the $2,500 included any single contribution of at least $250, she has not met the requirement for a contemporaneous acknowledgement because she received it after she filed her return. If the $2,500 comprises weekly $50 donations, her bank records can suffice.

28 Will she lose the tax deduction? If any separate contributions are at least $250, she might lose the deduction for those contributions if she is audited for that year.

29 What is the church s responsibility? Most churches send year-end statements by January 31 of the following year, but federal tax law does not require this. Although the church s failure to issue the statements earlier in the year created a problem for Susan, the responsibility to secure the contemporaneous acknowledgement of a $250 donation is hers. Susan should have waited to file a return claiming the deductions until she received the acknowledgement, even if the delay required her to request an extension of time to file her tax return.

30 Cash Donations A local businessman attends church regularly. Each week he puts a check for $100 into the offering plate and takes out a certain amount in change.

31 How does the church report this in his statement of giving? Because the church has no way of knowing how much cash he took from the offering plate, the report will show the amounts of his checks.

32 Is this honest? What can be done about it? NO It is neither legal nor ethical for the businessman to claim $100 donations on his tax return. The church could require all cash donations to be placed in envelopes, or it could change to a lockbox type of collection receptacle. If a church authority becomes aware of the member s practice, the church could refuse to issue a statement of giving to him (but the member will still have his canceled check to support the larger donation amount). At some point, the businessman will have to answer to a Higher Authority.