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.

It’s not just the thought that counts…

Your financial statements are a key to making decisions for your Church. Let me rephrase that…ACCURATE financial statements are a key to making GOOD decisions for your Church! 

I can’t stress enough just how true this statement is. Whether your Church is deciding to build a new campus, expand or remodel the existing campus, or even whether or not to purchase a new van for the youth trips, it is absolutely crucial that the Church is basing these decisions on accurate financial data.

A set of month end financial statements should be prepared on a timely (within 30 days) basis and submitted to the Church’s governing council. This “set” of financial statements should include at least a statement of financial position and statement of activities (more commonly known in the commercial industries as the balance sheet and income statement). The financial statements should include all funds: unrestricted, temporarily restricted, and permanently restricted.

Additionally, these financial statements should be reconciled with the amounts reflected in the accounting systems general ledger. For instance, if you pull an accounts payable aging report from your accounting system, does that total equal the amount you have recorded in accounts payable on your statement of financial position? It is very important that the Church’s sub-ledgers agree to the general ledger and financial statements. Two common fraud symptoms are a ledger that does not balance and that master account balances do no equal the sum of the individual customer or vendor balances.

How often is your Church preparing financial statements? What are some typical questions being asked by your Governing Council when reviewing these reports?

 -Tia Fisher is a Senior Auditor at PSK LLP, specializing in church accounting.

Cash in the Attic

Getting Value out of Your Church’s Financial Data

             One of my wife’s favorite television shows is “The Antique Road Show”.  Each week, people bring all kinds of antiques and assorted junk to an exhibit hall where experts tell them what they have and more importantly what it is worth.  I have to admit that the show has a certain appeal to me as well.  I particularly enjoy the scenes where people bring in some object they thought was at best sentimental junk only to find out they possessed an item with immense value.

             For instance, one man had an old sampler in what he thought was a very nice frame.  He had decided to throw the old sampler away because he needed the frame for another picture.  On a whim, he took “the frame” to the Road Show only to learn that he had an early 19^th century sampler worth more than $50,000! 

             When it comes to financial reporting and analysis many churches resemble this lucky man.  They sit on a wealth of financial information never realizing its tremendous value because most churches focus all their energy answering three questions: “How much money did we bring in?”  “How much did we spend?” and “How much is left?”

 While the answers to these questions are indeed important, they are concerned with where the church has been.  But, by digging deeper into the financial and statistical information it already possesses, a church can not only know where it has been, but also spot trends and determine where it is going.

             One way of digging deeper is to combine financial data with other information.  Most churches, particularly the larger ones, have sophisticated church management software that captures significant non-financial information such as names, addresses, ages, zip codes, and contribution history to name a few.  Combining accounting information with this information greatly enhances a church’s planning abilities.

             To illustrate let’s focus on the revenues of a church.  The process is begun by adding one question to the ones mentioned above.  In addition to asking how much money the church has brought in, we also need to ask, “Who gave the money?”      

             In the next series of posts I will share several ways churches can dig deeper in order to answer this question.

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

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.

Endowment Fund Disclosures

In the past year or two, Texas and many other states, have enacted a version of a new model institutional funds act (UPMIFA). In response, the Financial Accounting Standards Board issued a staff position paper (FAS 117-1) in August 2008. It applies to not-for-profit organizations (including churches) beginning with 2008 year-ends. Many are completely unaware of this new pronouncement which addresses net asset classification as well as enhanced (financial statement) disclosures. In addition to disclosure of more details about endowment activities, the organization must disclose in the notes to its financial statements information about:

1. its governing board's interpretation of the laws pertaining to the endowments,

2. investment policies, and

3. spending policies and how they relate to the organization's investment policies.

In light of the recent securities markets doldrums, many funds have deficiencies that require disclosure as well (not related to new pronouncement, but according to FAS 124.)

The FASB staff position paper is available on line: http://www.fasb.org/pdf/fsp_fas117-1.pdf 

Also, in Texas, UPMIFA is technically Chapter 163 of the Texas Property Code: http://tlo2.tlc.state.tx.us/statutes/docs/PR/content/pdf/pr.010.00.000163.00.pdf

Coffee Shops

Does your church have a coffee shop?  Many churches have found that coffee shops are a great way to increase fellowship at their churches.  Often times, PSK is asked about the tax and accounting issues that come along with coffee shops.  These are great questions!  Nonprofit organizations can be taxed on dollars that are earned from activities that are not related to their tax-exempt purpose.  So, is selling coffee supportive of the church's tax-exempt status?

The IRS has some specific rules regarding coffee shops run by churches.  If the shop is run by volunteers and the purpose of the shop is to provide a format for church members to congregate and have religious discussions, then the shop supports the exempt purpose of the church and income would not be taxable.  If the church's coffee shop is attempting to compete with Starbucks, then there could be some tax ramifications.  Whether or not that income is taxable, it is a good idea to code all coffee shop activity separate general ledger accounts, one account for income and another account for expenses.

Contact PSK if you have specific questions about your church's coffee shop!