Faith-Based Accounting

YA MEAN I GOTTA DEAL WITH THE I.R.S.?

That’s right!  Even though churches normally do not have to file a tax return (most nonprofits have to file an informational return annually – IRS form 990), there is certain information that you must collect and provide to the IRS.  And I’m not talking about payroll tax information – 941 and W-2 forms.

If you pay at least $600 in a calendar year for the services of non-employees (and they are not corporations), you must get them to complete form W-9 (provides tax reporting information to you) and you must issue them an IRS form 1099-MISC.

 And if the church operates a preschool or private school that is not separately incorporated, you must file IRS form 5578.  This is a statement about racial non-discrimination.

 And if your church has “unrelated business income” of over $1,000 before deducting related expenses, you must file and IRS form 990-T.  Again, I’m not talking about net income of over $1,000; I’m talking about gross receipts of that amount.  And you could possibly have to pay income tax!  But that’s the subject of a whole new blog entry!

For more information, go to the IRS website – www.irs.gov.  Or even better, contact us at www.pskcpa.com.

 

 --Dan Williams, CPA, Church and Ministry partner at PSK LLP.

Be Thankful Even for Taxes

I have a friend who has reminded me to be thankful for annoying things such as the red light I am stopped at, because I am privileged enough to live in a country that has roads, and orderly ones at that. This same attitude can be applied to taxes—thankfulness for them and for the ability to pay them.

I wanted to start with this thought, because none of us like taxes. But we can be thankful for them, and also take care to report them properly. As additional incentive for excellence in this area, did you know that if payroll taxes are not withheld and paid to the IRS, the Church’s Board of Directors and employees may be personally liable? Some thoughts on ensuring your Church is addressing taxes appropriately:

Who performs the Church’s payroll? Even If the Church is fortunate enough to use an outside payroll service provider, it is still important that the Business Administrator ensure that the following are occurring:

• For all non-minister employees, the Church correctly withheld and paid the employees’ share of FICA taxes.
• IRS form 941 was filed for each quarter of the calendar year.
• The totals from the four quarterly 941 forms agreed with the totals on IRS form W-3, which is prepared at year end and filed with the IRS along with employee W-2s by February 28 each year.
•  Timely deposits of payroll taxes are made to the IRS. Required deposits vary. Generally, deposits may be made quarterly if total quarterly payroll taxes are $2,500 or less. Otherwise, deposits must be made monthly, or even more frequently for very large organizations.
• W-2 forms are provided to all employees (including ministers) by January 31.

How about your Church? Do you know for certain that payroll taxes are calculated, withheld, and remitted to the IRS correctly and in a timely manner?

 

--Justin Baldwin, CPA is a Senior Auditor specializing in church accounting with PSK LLP.

Making a List and Checking it Twice (Unsolicited Accounting Advice from Santa Claus)

Though "making a list" might sound simplistic, it is important to track a church's fixed assets at some level or another. Whether utilizing software specific for this purpose or general-use software such as Access, FileMaker or Excel, a church should develop a database of some sort to aid in this tracking process. Whatever solution it employs, churches should ensure that the database includes accurate relevant details such as the cost of the item, the date acquired, its service life, and any accumulated depreciation. Many CPA firms have depreciation software that can be utilized as well.

Once you make the determination of how to track this information, it should be input into the fixed asset module or another software program designed for maintaining fixed assets. Tracking property and equipment in a spreadsheet program like Excel can become an administrative burden, but is a viable solution in some instances.

A database should be kept up-to-date for insurance purposes as well as for proper accounting. These objectives might overlap, but each subset may contain different records, as the criteria for tracking are different. The church insures buildings and property in the event that there is a theft, tornado or some other tragic event, so having a detailed inventory of the church’s assets could be critical.  A current inventory listing of property and equipment allows the church to present to the insurance company an accurate record of the assets that were lost. This property and equipment inventory should include the date of acquisition, a description of the asset, quantity, and location.

In addition to a listing, we also suggest that a church make an annual video recording of the Church property. Such a video would slowly scan church property, panning each room carefully, and should be done at least once per year. It could even be a fun project for the youth pastor and a couple of students. The inventory listing and/or video should be duplicated and stored off-site for safekeeping.

Finally, churches should prepare a periodic reconciliation of the fixed assets or depreciation schedule to the G/L. That ensures that the physical listing agrees with the financial statements and records, thereby ensuring the accuracy of both.

A fraud resistant church will watch over its assets by maintaining accurate and thorough property records, taking periodic inventories of its holdings, and making security a priority.

What software do you use to track your fixed assets? Is it reconciled routinely? Do you tag your assets? When was the last time you performed a physical inventory?

 

--As National Relationship Manager with PSK LLP, Delton de Armas is a self-described right-brain dreamer solving left-brain problems, focusing on developing relationships with church leadership, layman, and other supporting professionals to help identify challenges and offer creative solutions. 

   

Know What You Owe

Both, a statement and a question!

Knowing what the organization owes as well as having confidence you have a complete and accurate picture really takes little to no effort. Start with a review of the debt amortization schedule.  This schedule should require all note obligations and commitments including mortgage, loans, and leases.

Review the schedule on a routine basis, maybe monthly, and verify all obligations are reflected accurately on the balance sheet. For added assurance, periodically request written confirmation of the balance owed, directly from the lender. This should correspond to the amortization schedule. One added measure is a review of the general ledger for regular payments for the items listed on, or excluded from, the debt schedule.

As busy as your organization is, it is easy to miss something when trying to put it all together at the end of the year; but it is also easy to ensure all debt and obligations are accounted for with these basic internal audit steps.

Please share your insight. How involved or simple is your debt schedule? What do you feel needs to be included to be complete?

-- Lisa Chapman is an auditor specializing in church accounting at PSK LLP.

Anyone want some money?

At that announcement the line begins to form.

Cash disbursements are easily the most manipulated, error prone process of any organization. Without proper controls and oversight in place, and in practice, money doesn’t have to grow legs and walk – it gets handed out. Maintaining an internal audit process of this area is essential and very easy.

Review the written policy covering the procedures for all transactions paid through the organization. The procedures should include the requirement for support of all disbursements, including the rare petty cash reimbursement.

Review documentation, such as a voucher or request form; it should be completed with the place, amount, and purpose along with the original receipt (dated within 60 days of the request) and a copy of the issued check or stub. Verify check stock is secure and account for all check numbers, including voided checks.

As an added measure, review the most recent cash disbursements against the general ledger to ensure they are recorded accurately.

Does your organization have an accountable reimbursement plan? Do you ever have a hard time getting receipts from employees?

- Lisa Chapman is an auditor specializing in church accounting at PSK LLP.

Who (what) has my heart?

I am a “youngster” when it comes to accounting, and especially accounting for churches and non-profits. One thing that has caught me off guard about the inner world of some non-profits (some churches!) is their excessive desire for funds and financial position. Most churches seem to get it right; some do not. In my subconscious I am often asking, “Does this church that I am auditing really know and love Jesus? Do I see them loving their co-workers and loving me and my fellow auditors?” This has caused me to think more about my own faith, and about what the Lord requires of me. It seems that Jesus is concerned with the state of our hearts. Jesus says, “No one can serve two masters. Either you will hate the one and love the other, or you will be devoted to the one and despise the other. You cannot serve both God and money.” (Luke 16:13). We desire money personally because we believe it brings security and power. Our churches are vulnerable to the same desire. We are a vulnerable breed. So what is our (my) motivation for loving Him above money and the sense of security that it brings? His Love, which is beyond my comprehension. I have asked myself before, money in hand, “Does this piece of green paper love me? Is it alive, and able to take care of my deepest needs?” Absolutely not. Compare that with God, who came to this earth, suffered incredibly, and tasted death for us. He calls us brothers, friends, righteous; all because of what he has done. He gives us hope that this world is not all there is. And that’s not all. When we realize our hearts are not what they should be, we can cry out to him, the one who makes everything right. “Create in me a pure heart, O God, and renew a steadfast spirit within me” (Psalms 51:10).

The management and accounting for money is essential for us personally and for the Church. We are the Lord’s kingdom on earth; this task should be performed with excellence! But let us not forget that this is not the reason we are here. After all, if we are not living for the Lord and building His kingdom today, what are we here for?

In summary, money and accounting for it is not our end goal. Christ is. Let us perform our sometimes-menial accounting tasks with excellence as we remember that He loves us so much, and that He desires our hearts’ affections.

Justin Baldwin

 

Establish Clearly Defined Ways for the People to Give

“Jehoiada the priest took a chest and bored a hole in its lid…” (2 Kings 12:9)

 

            Frustrated by the lack of action, Joash takes matters into his own hands.  At the king’s command a chest was made and a hole bored in its lid.  The chest was then placed by the altar and positioned in such a way that anyone entering the temple would pass right by it.  Joash was giving his priests a lesson in fundraising. 

I find it interesting that he didn’t raise money with mass appeals.  We see no one making speeches in this passage.  No mention of pledge cards and no attempts to raise funds by laying a massive guilt trip on the people.  He simply established a clear, well defined way for the people to give to God’s work.  And, it worked.  The money was raised and the temple was restored.

I didn’t learn this principle from a church accounting handbook or by consulting with capital campaign experts.  I served as a bi-vocational minister for a number of years.  My place of service was in a disadvantaged part of our city, a place never included in any chamber of commerce brochures boasting of the merits of living in our community.  Most of our church members were poor, many extremely so.  As a result, I was reluctant to talk about money, much less ask these folks who had next to nothing to give me some of the little they had.  In fact, we never asked for money, discussed money or passed an offering plate.  In my “common sense”, practical CPA perspective, I rationalized that it would be embarrassing to ask them to give back some of the assistance money we were giving them in the first place.

It was not until deep into my ministry that I realized I was doing my people a major disservice.  By not asking for money, (Or, rather not giving them a chance to give) I was not helping my people at all.  In fact, I was hurting them.  As their pastor, I was robbing my flock of an opportunity to participate in Kingdom work.

When I came to my senses, I made some changes.  We placed a small basket in a prominent place.  We didn’t pass it around during our services.  We simply told the people it was there.  This gave our people a chance to participate in an act of worship.  And the people gave.  Not a large amount, as Wall Street measures things, but by Kingdom standards their gifts were an immense treasure.

KEY: The principle here is that as leaders of the flock, pastors need to be sure to give the people the opportunity to give.  Because “they are always asking for money” is a frequent excuse given by non-church goers for avoiding church many are reluctant, like I was, to ask or even talk about money.  However, there is some research indicating that “money talk” really is not that much of a factor in people avoiding church.  (Feeling unwelcome and lack of relevance seem to be more likely the cause of church avoidance!)  What I have learned from my own experience is that an open discussion of money and a transparent accountability system results in confidence and trust by the congregation.  If stewardship is taught as one part of a strong discipleship and worship program, and not just a once a year or on an as needed (crisis) basis, the church congregation will not fear, detest or dread the topic.  They will embrace it.

 

Verne Hargrave is the Church and Ministry partner at PSK LLP and author of the book, Weeds in the Garden.

Mentors Matter

 

“Joash did what was right in the eyes of the LORD all the years Jehoiada the priest instructed him.”  (2 Kings 12:2)

 

Joash “came to power” at the ripe old age of seven.  His life can be divided into two stark contrasting periods:

 

• The time when Jehoiada was high priest. - Joash was instrumental in restoring the temple and reinstituting its services.

 

• The period following Jehoiada’s priesthood  - Joash was instrumental in reinstituting the worship of Asherah poles and idols

 

What went wrong?

 

            Joash’s life teaches two important lessons about mentoring.  First, his life illustrates the tremendous impact a godly mentor can have on a leader.  As verse two tells us, as long as Jehoiada was there to coach and counsel Joash, Joash did what was right.  While Jehoiada was alive, Joash inspired the people to give sacrificially to the temple restoration campaign.  With the funds in hand he was able to see that the temple was restored from neglect and vandalism.  Most importantly, with Jehoiada at his side, Joash was able to reinstitute the long neglected burnt offerings. 

            However, Joash’s life teaches a lesson; what can happen when a leader has no mentor.  Like Joash, a leader with no mentor can easily succumb to bad advice.  After Jehoiada had died, Joash “listened to others”.  He abandoned the temple and shortly thereafter his people fell to worshiping foreign gods.

            KEY: A good financial mentor is an invaluable resource to a pastor.  This is true regardless of the experience level of the minister. From just beginning in ministry to closing in on retirement, every pastor, at every stage of life, needs financial counsel they can rely on.  Unfortunately, most pastors have limited knowledge and experience about money and management.  Because of these limitations, no pastor can afford to play “Lone Ranger.”  Someone a pastor can confide in and rely on is essential.  But, care must be exercised in selecting the right guide.

 

• A mentor should not be chosen on financial ability or business acumen alone.  The mentor needs to be someone on a spiritual journey himself.  Just because a person is good in business doesn’t mean he will be good for the church.  One thing needs to be remembered; the pastor needs to seek out godly business counsel. 
• A pastor also needs to choose someone who will shoot straight with him.  “Yes men” will get you nowhere.  (Actually they will get you somewhere you don’t want to be!)  Good counsel is sometimes painful, but it is still essential.  A pastor needs someone who will give him the truth, the bad as well as the good. 

Noted theologian Dr. Howard Hendricks describes this type of person as a Barnabas.  “Someone who loves you, but is not impressed with you.”  In short, someone who will shoot straight with you.

           

With these ingredients, a mentor can help the pastor interpret the financial times of his church.  A mentor will help guide the minister into good decisions and assist the pastor in “doing what is right.” 

 

Verne Hargrave is the Church and Ministry partner at PSK LLP and author of the book, Weeds in the Garden.

 

The Title "Mentors Matter"¹ 

[1] Excerpt from, Practical Aspects of Pastoral Theology. Christopher Cone Th.D Ph.D (Editor), Tyndale Seminary Press. You can find the book at http://www.tyndale.edu/tsp.html or at http://www.amazon.com/Practical-Aspects-Pastoral-Theology-Christopher/dp/0981479154/ref=sr_1_10?ie=UTF8&qid=1286287914&sr=8-10

Things I Learned from King Joash

(About Church Business)

 

It is extremely difficult but I try not to bring my work home with me. However, my thoughts often drift to finding ways to help churches while not in the workplace.  For example, occasionally during my personal Bible study time I will see examples of good, as well as bad, financial behavior exhibited in the pages of Scripture.  The story of King Joash in 2 Kings 12:1-16 and 2 Chronicles 24:1-24 is one example.  On one occasion, while reading these passages I saw ten principles or maybe I should call them “best practices” of church financial integrity. 

           

First, however, I wish to beg forgiveness before I begin.  I must inform you that I am an accountant, not a Bible scholar.  In what follows I am not attempting to interpret the Scriptures. I will leave that to much more qualified people. I am simply sharing some basic principles of church and pastoral financial accountability that came to mind as I read from God’s Word.

 

These thoughts were included in Practical Aspects of Pastoral Theology published by Tyndale Seminary Press.  You can find the book at http://www.tyndale.edu/tsp.html or at http://www.amazon.com/Practical-Aspects-Pastoral-Theology-Christopher/dp/0981479154/ref=sr_1_10?ie=UTF8&qid=1286287914&sr=8-10

 

 

Verne Hargrave is the Church and Ministry partner at PSK LLP and author of the book, Weeds in the Garden.

Masters Degree in Church Management!

The University of Dallas just announced a new concentration in its Masters in Pastoral Ministry program - in Church Management!  Now, this isn't a Masters degree in Church Management itself, but a concentration in Church Management in the context of a Masters degree in religion/theology.

Another indication that church denominations are recognizing the need for quality training that combines business expertise with a passion for ministry.  And I think that's great!!

http://www.udallas.edu/.  Just click on the following tabs - Academics; School of Ministry; and Our Graduate Programs

Interest Rate Swaps

Many churches have long-term debts, such as a mortgage, that have variable interest rates associated with them.  There is much uncertainty that comes along with paying variable interest rates on large amounts of debt over 20 to 30 year periods.  Entering into an interest rate swap is an option available to churches that can help reduce this uncertainty.  Although the term "interest rate swap" may sound intimidating on the surface, they really work quite simply. 

For example, a church has a 20 year mortgage in the amount of $2 million.  The mortgage has an interest rate of prime plus 1%.  The church is uncomfortable paying a variable rate on $2 million so they enter into an interest rate swap agreement to effectively fix the rate at 6%.  Big picture, the church would continue to pay their mortgage payment at the variable rate.  The swap counter-party would reimburse the church for the amount of variable interest paid in exchange for the church paying the swap counter-party a fixed rate of 6%.  So, effectively, the church is able to pay a fixed rate of 6% throughout the life of the interest rate swap agreement.

There could be a price to pay for eliminating this uncertainty.  Using the example above, at times when the variable rate is less than 6%, the church would be paying more interest than they would had they not entered into a swap agreement.  On the flip side, then the variable rate rises above 6%, the church would be saving money.

Of course there is no way to predict which direction that rates will go (unless you have a crystal ball!!).  However, from a budgeting standpoint, a fixed interest rate can be more attractive then a variable rate.  It could also protect against unexpected increases in mortgage payments if interest rates were to rise dramatically.