Faith-Based Accounting

Please don't sue me!

In our litigious society, it seems like people file lawsuits for just about anything, but since when did copyrights and licenses become so sensitive?  The old days are gone; the truth is, operating a Church becomes more and more complex every day.  So what are a few things an administrator can do to protect their organization?

 

Worship Music, for example, is majority owned by record labels.  The Christian artists usually make licensing deals with organizations like Christian Copyright Licensing International (CCLI.com), which in turn charges a yearly subscription fee based on the size of your congregation (starting for about $50 for a small congregation).  Some worship pastor's prefer to write their own music, which is great because you don't have to buy a license for their works.  However, then the question arises - who owns those songs he/she writes on the clock?  An intellectual properties policy can help clear up any confusion between you are your creative team.

 

Does your Church show videos in youth group or as an illustration in a sermon?  There are other groups for videos such as Christian Video Licensing International (CVLI.com) that sell affordable licenses to view certain protected materials within your organization.  

 

Even looking at your copy machine, it's a best practice to have a notice posted by each machine warning against the duplication of protected materials.  And finally, let's not forget about software.  Make sure that when you are buying software that you are respecting the software licensing agreement and abide by the notice as to how many computers and users that each license allows. 

 

Is your organization at risk?  Need help navigating any of these areas?  PSK can help!

 

 

--Daniel Lienemann, CPA is a Senior Auditor specializing in church accounting at PSK LLP.

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.

Health Care Bill Provides Money For Small Churches

Does your church have 25 or fewer full time employees?  If so, the government wants to give you some money.  The recently passed health care bill included a tax credit for small businesses that provide health insurance for their employees.  Although churches do not typically file income tax returns, they are still eligible for the tax credit.

You are correct, there is a catch!  There are three primary factors that would qualify your church:

• The church must pay for a portion of its employees’ health insurance
• The church must have less than 25 full-time employees
• The average wage of a full-time church employee must be below $50,000

If your church meets the criteria above, the church could be reimbursed up to 25% of the health insurance costs that were paid by the church.

As of now, the credit is good for 2010 to 2013 and then the maximum rate increases to 35% (good news).  This could be money in your church's pocket!  Let PSK assist you in determining if your church qualifies for the health care tax credit.

990-N Filing Threshold Increased

Great news for the small nonprofits.  The filing threshold has finally increased from $25,000 in gross receipts to $50,000 in gross receipts for tax years ending on or after December 31, 2010.  This means if the nonprofit’s gross receipts are normally $50,000 or less you can file the simple 990-N e-postcard as opposed to the more detailed 990-EZ or 990 forms.  To read more about how to determine if you gross receipts are considered $50,000 or less, check out the IRS's website.

It is simple to file an 990-N.  Simply go to the IRS's website and follow the instructions.  The process takes less than 15 minutes.

The increase in the filing threshold for 990-N is part of the 2006 Pension Protection Act of 2006 which mandated most tax exempt organizations file an annual return.

New Changes in Payroll Taxes

The Tax Relief, Unemployement Insurance Reauthorization & Job Creation Act that was signed into Law in December 2010 has made changes to the way you calculate your social security deductions on your employee paychecks for 2011.

Social Security tax rates will be reduced by two percentage points. The employee-portion of Social Security taxes will be reduced from the current 6.2% to a temporary rate of 4.2% for 2011 only. The employer-portion remains the same at 6.2%; and the Social Security wage base remains the same at $106,800 for 2011. Medicare tax rates are not changed: remaining at 1.45% each for employees and employers. Freelancers, farmers and other self-employed persons will see a corresponding reduction in their self-employment tax. The total 15.3% self-employment tax rate is temporarily reduced for 2011 to 13.3%. Self-employed persons will still be able to deduct the full amount of the employer's portion as an adjustment to income.

You have until January 31, 2011 to make sure you are calculating your employee deductions correctly and until March 31, 2011 to correct any payroll in January that might have been calculated using the old 6.2% deduction rate.

Please give us a call if you have any questions.

OOPS!

My previous blog gave the wrong website address for ECFA (the Evalgelical Council for Financial Accountability) - the correct address is www.ecfa.org.  Sorry about that - unless you're interested in the Ethan Cohon Fine Arts Center in NYC!

ECFA and Commission on Financial Accountability

Just finished listening to a webcast of the Evangelical Council for Financial Accountability (ECFA) - www.ecfa.com - on the commission it's been asked to set up by Sen. Charles Grassley (R-Iowa).  For several years, Grassley's been pushing hard on some high-profile tele-evangelists on some big questions.  Now, he's asking the ECFA to be an independent group and offer suggested solutions to some key issues.  A couple of the areas to be examined:

1. Should churches be required to file an IRS form 990, like other nonprofits?

2. Should the ministerial housing allowance exclusion be modified/limited?

3. Should the prohibition against political campaign intervention by churches be repealed?

4. Sould there be tighter requirements related to "love offerings"?

I think the ECFA is very much on our side, so they'll protect the interests of churches in general.  Still, because it is a long-standing advocate of financial accountability by churches, the ECFA will probably advocate some tightening up in certain areas.

PSK is planning on being involved with the commission, at least in providing input.  Thoughts anyone?

Are you at risk of losing your tax exempt status?

Tax exempt organizations are required to file an annual return with the IRS.  If the organization fails to do so for three consecutive years, the exempt organization automatically loses its exempt status.  The IRS announced today one-time relief benefits for Form 990-N and Form 990-EZ filers that have failed to file for the previous three years.  

Please note that the relief does not include organizations that are required to file a Form 990.  To read more about this one time exemption, click here.  The IRS provided a list of organizations that are at risk of automatic revocation.  You can view the list here. 

If you need help with your annual filing requirements, please contact us.  We will walk you through the process and help you stay in compliance.

Failure to File Form 990 for 3 years = No longer tax exempt

As you may know, the IRS revamped the Form 990 a few years ago.  During this process a law was passed that requires an automatic revocation of tax exempt status for failure to file form 990, 990-EZ, 990-N or 990-PF for three consecutive years.  Did you get that?  You will lose your tax exempt status if you do not file your annual return three years in a row?  If you do lose your status, you have to start the application process again.  The IRS cannot reverse the revocation. 

So let's review the rules on who must file.  Most tax exempt organizations must file an annual return (except for these organizations).  Here are four types of returns - 990, 990-EZ, 990-N, and 990-PF.  The following thresholds are for the tax year 2009.  The 990 must be filed if the tax exempt organization has gross receipts equal to or greater than $500,000 OR total assets equal to or greater than $1.25 million.  The 990-EZ can be filed if the tax exempt organization has gross receipts equal to or less than $500,000 OR total assets equal to or less than $1.25 million.  The 990-N must be filed if the tax exempt organization has gross receipts equal to or less than $25,000.  Private foundations must file a 990-PF regardless of financial activity.

The 2010 tax year thresholds drop to $200,000 for gross receipts and $500,000 for total assets.  The 990-N threshold increases to gross receipts equal to or less than $50,000.  This can be confusing so I recommend you use the IRS charts.

Here is where this might affect you or someone you know.  The 990-N is a relatively new form and small organizations simply may not be aware of the new filing requirements.  Another example includes organizations with volunteer officers that rotate frequently.  It is important that all tax exempt organizations, regardless of size have a process in place to ensure annual compliance.  As you can see, annual compliance has become critical. 

You can find more information on the annual filing requirements here.  PSK is here to help.  Please call to schedule an appointment if you need help with your organization’s annual filings.

 

Good morning,

I hope everyone is finding a way to keep cool in this brutal summer heat.  Unfortunately, what I am about to tell you may cause your thermometer to pop up a few degrees!

Over the last year and a half or so, we have been advising our church clients and breakfast attendees that the IRS’s attitude towards churches and ministries appeared to be taking a less than desirable turn.  Our fear was that due to some high-profile cases of abuse, the IRS would begin taking a closer look at churches, ministries and individual ministers.  This week, our fears were confirmed by a brief comment in The Kiplinger Tax Letter.   The following is a quote from the July 10, 2009 issue.

“Ministers will get special attention from auditors as well:  A new audit guide tells examiners to be on the lookout for several potential trouble spots.  Among them: Incorrectly figuring the tax free housing allowance and failing to pay SECA tax on it.  Wrongfully claiming to be exempt from SECA tax, and deducting business expenses that are attributable to tax-exempt income. Go to the IRS's guide to check out the complete list of tax issues that examiners will be looking for.”

You might want to follow the link above to make sure you will come out ok should your church or any of its ministers receive one of those very inconvenient letters from our friends at the IRS.

If you need any help interpreting any of the IRS gibberish don’t hesitate to give us a call. 

Also, this might be a good time to consider having PSK perform an IRS compliance review.  In a compliance review we perform many of the tests that an IRS auditor would perform with one huge difference.  If we find areas of noncompliance we help you get it fixed.  If the IRS finds it… Well you know.

Stay cool…
Verne

Do you want to comment on proposed IRS Cell Phone regulations?

Related to the last post on IRS & Cell Phones, I read the actual IRS Notice 2009-46.  The IRS is considering three possible approaches, and they will allow public comment through September 4, 2009.  Go here to see the details. What approach would you suggest?

IRS & Cell Phones

The IRS Commissioner released this statement last week regarding the taxability of employer provided cell phones.  There has been much confusion on this topic.  The current law requires that the employee keep records supporting business use and personal use of employer provided cell phones.  The employer is then required to include the value of personal use as wages. 

These requirements can easily become overwhelming and impractical in this culture.  It is good to see the IRS is agreeing that the rule is outdated and simplification is needed.  Now it is up to Congress to fix it. 

Exempt Organizations & Texas Taxes - Are you required to file?

State requirements for exempt organizations vary from state to state.  In Texas, a charitable organization can apply for exemption from sales tax paid on purchases and franchise tax.  The application can vary depending on the type of organization.  The exemption is granted based on the organization’s federal exemption. 

Click here for a link to the guidelines for exempt organizations published by the Texas Comptroller of Public Accounts.

It is important to note that exempt organizations must collect tax on most of their sales.  There are a variety of exceptions to this, so you really must research what you are selling.  The state has a publication to guide exempt organizations on this matter. 

One last piece of information I will leave with you is that you can search for exempt organizations registered with the state at the Comptroller’s website at this link.

Call us if you need help with your tax exempt organization’s state requirements.

Making Work Pay Credit and Your Employees

The IRS has issued the 2009 version of IRS Publication 919, How Do I Adjust My Tax Withholding? as a result of the "Making Work Pay" credit in the American Recovery and Reinvestment Act of 2009 (ARRA).

Employees can use this publication to help them determine if their federal income tax withholding is sufficient, and, if necessary, prepare a new Form W-4 to adjust their withholding. The publication includes worksheets for projecting 2009 tax, withholding, and deductions. For 2009, a new worksheet (Worksheet 12) has been added on the "Making Work Pay" credit.The amount of the "Making Work Pay" credit is $400 (unless the person makes under $6,450; then it’s 6,2% of compensation).  Because the credit is refundable (people can get it even if they owe no tax), most low-income workers will also qualify for the full credit.  The credit is phased out for a married couple filing a joint return whose modified adjusted gross income (AGI) is between $150,000 and $190,000, and for other taxpayers whose modified AGI is between $75,000 and $95,000.

It is a good idea to look at Publication 15T and print out the employee notice (on page 73 of the publication) that you should provide to your employees explaining the changes.  Some employees are beginning to discover after filing their 2008 personal income tax returns that they didn't have enough money withheld from their paychecks.  Employees may really feel the shortfall in 2009 with the changes in the withholding rates.

IRS releases Dirty Dozen Tax Schemes

... and charitable organizations make the 2008 list.

The IRS listed the misuse of charitable organizations as one of the 12 most egregious tax scams by taxpayers.  Abuse by donors who try to maintain control over donated assets or income from donated assets is just one example.  Taxpayers are also claiming overvalued property donations for a larger deduction.  Finally, taxpayers are disguising private tuition payments as contributions to charitable or religious organizations.

This information is good to keep in mind.  We all like to think that our donors have the best intentions but the IRS is saying that these scams are happening on a large scale basis.  If you have someone who wants to control how their donation is used, you should know that the donation is considered a donor advised fund and is subject to strict rules. 

Noncash contributions also have certain requirements.  Individuals are required to file a form 8283 for noncash donations over $500.  A form 8282 is generally required to be completed by the charitable organization (aka you) to report dispositions of certain charitable property made within 3 years after the donor contributed the property.  Yes, I did say 3 years.  Certain charitable property is any donated property other than money and publicly traded securities over $5,000.

Remember there are usually exceptions to the rules but I have listed the general rules. 

Click here to see the entire list.

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!

Crisis Management

At our most recent monthly breakfast for church business administrators, Lawrence Swicegood offered great info on Crisis Management.  He runs Clarion Call Marketing - www.clarioncallmarketing.com.  Very insightful!  Everything from how to be prepared even before a crisis erupts, how to handle and how to do a "post mortem."  Topics, in outline form:

• Everyone is Affected by a Crisis
• Characteristics of a Crisis
• Planning for a Crisis
• Potential Crises for a Church
• Developing a Response Plan
• Internal & External Communications

• Post Crisis Analysis

For more info, contact Lawrence (lswicegood@msn.com) or give us a call at PSK.

Your Mission Trips and Homeland Security

Last week, we had a presentation here at PSK on this topic!  Homeland Security and the Patriot Act are musts when thinking about your church's Mission Trips.

Steve Tiemann was our speaker.  He is an attorney who has lots of experience both as a lawyer and as a church member in this area. www.swtlaw.net.

Main points -

• Know the guidelines.  The US Treasury has issued Anti-Terrorist Financing Guidelines.  Boring but an essential 16 page document to be aware of.  Check out http://www.ustreas.gov/press/releases/0929%20finalrevised.pdf. 
• Know who you're dealing with.  In the foreign country, have intimate knowledge about the organizations and/or individuals you're sending money to.  You can check out the Terrorist Exclusion List (TEL) at the US Dept of State's website - http://www.state.gov/s/ct/rls/fs/2004/32678.htm.
• Know that the US Gov't is serious.  Federal law doesn't allow you to use the excuse: I didn't know!  If your church or organization inadvertently supports terrorists or terrorist organizations, you're guilty! 

W-2's for Ministers

As part of your year-end payroll processing tasks, you might have a question or two about reporting minister's earnings and allowances on Form W-2.  Maybe, you just need a refresher.  Here are the general topics that we receive questions about.

Salary - Salary paid to minister is reported in Box 1.

Federal Withholding - May or may not be zero.  Ministers are exempt from withholding requirements but may elect to have withholding.   Enter the amount withheld.

Social Security, Social Security Withheld, Medicare, and Medicare Withheld - Ministers are considered self-employed for purposes of Social Security and Medicare taxes so these boxes are blank.

Housing & Utility Allowances - Should be reported in Box 14.  Remember that housing and utility allowances should be officially designated by the church in advance. 

All other boxes on the W-2 are generally the same for ministers and non-minister employees.

The IRS has an example of a Minister's Form W-2 in its Publication for Clergy and Religious Workers.  See it at ...

http://www.irs.gov/pub/irs-pdf/p517.pdf

Also, there is a good IRS Publication for Churches and Religious Organizations that cover a variety of tax issues.  Check it out at ...

http://www.irs.gov/pub/irs-pdf/p1828.pdf

Your Church and Terrorists; Something Else to Worry About

Our clients keep us on our toes! Because we encourage them to call us when they have a problem and we generally don’t charge for phone calls, we get a steady stream of questions posed to us by our clients and friends.

Most of the questions are quite routine, dealing with things common to all churches: whether or not a particular employee qualifies for a housing allowance or if a designated gift should be treated as a deductible contribution. But occasionally something new comes along.

PSK hosts a monthly breakfast for church business administrators where in addition to a delicious meal the attendees are treated to a discussion of a topic relevant to church business administration. In May our breakfast was billed, “Know Before You Go” and we discussed things that must be considered when planning a short term mission trip. For example what do you do if a member asks for contribution credit for paying for a specific individual to go on the trip? We also covered trip organization (passports, visas, shots etc.), paymaster responsibility and record keeping and insurance.

But, something I was asked recently made me aware we had left something out. “We are sending money to a mission group in Africa. Can we get in trouble with Homeland Security?” Turns out they and other churches funding ministries like schools, hospitals and orphanages, should be concerned.

Now, I don’t want you to get overly concerned. The reality is that it is unlikely that a church will have its assets frozen or exempt status threatened by funding an orphanage. Provided, of course, it takes minimum precautions. Here’s just a few:

• First become familiar with Executive Order 13224 and The USA Patriot Act the legislation requiring that certain things be done. Helpful resources are The US Treasury’s Anti-terrorist guidelines (http://www.ustreas.gov/press/releases/docs/tocc.pdf) and The Principles of International Charity. (http://www.usig.org/PDFs/Principles_Final.pdf)
• Educate your church, both staff and laity, of the implications of the anti-terrorist rules.
• Do background checks on the groups you are helping, particularly referring to several government lists that identify terrorists.
• Keep good records of all of your activities and insist on accountability.

There you go; something new to worry about over your Christmas holidays. If you have any questions, don’t hesitate to call!

Merry Christmas!

W-2's - Are You Ready For Year End?

It is getting to be that time of year to prepare for your year-end payroll processing.  Have you ever been a lucky recipient of a letter from the Social Security Administration stating that you have reported incorrect names or social security numbers on your W-2's?  Do you have a process in place to ensure you don't receive this letter? 

Here is a link to a list of good business practices to ensuring your are issuing correct W-2's.  http://www.ssa.gov/employer/critical.htm.

Stay tuned... my next blog post is on reporting minister wages.