Tax Credits for Churches and Ministries? by Mark Helland CPA
Tax Credits for Churches and Ministries?
Mark Helland CPA
After months of partisan debate, the “Patient Protection and Affordable Care Act” became law last year on March 24, 2010. The Act is widely considered to be the most significant piece of medical insurance reform legislation in the past thirty years. Known generally as “health care reform” or “Obama care” it is also highly complex and controversial, with major implications for the U.S. economy. The Act is not an easy read by any means, being over 2,400 pages in size and therefore the components of the Act will take a while for everyone to absorb.
Despite the controversial nature of the Act, the admirable intent was to expand health insurance coverage to more Americans with the goal being that 95% of Americans will be covered in the future. What makes the act so controversial are the logistics of how this goal will be accomplished and the, dare I say, creative accounting from the congressional budget office as to how it will be funded. The provisions of the Act will be phased in over nearly ten years so certain components are years away from going into effect while other components are already in effect. One provision that is in effect now (which actually took effect for the year ended December 31, 2010) is the creation of a health care insurance tax credit for organizations that offer health insurance to employees.
Before I explain the application of the health care insurance credit for churches and ministries, it might be helpful to first explain the concept of a “tax credi.t. Tax credits exist for hundreds of items under the IRS code, for example, anyone with a dependent child that files a U.S. tax return is potentially eligible for the $1,000 “child tax credit”. Credits are also currently offered to individuals for energy efficient home improvements, dependent care expenses, foreign income taxes paid, etc. These credits and their income limits, phase-out levels and other rules are subject to constant change based on the ever-changing U.S. tax code. A tax credit is essentially a direct offset against income taxes owed, as opposed to a “deduction” which merely reduces the income on which an individual or business is taxed. So, tax credits are extremely valuable items if you can qualify for them, and it makes sense to understand how these might be maximized for your organization.
Because churches and ministries that are qualified as 501(c) organizations are tax-exempt, it would seem that a tax credit would not be possible because there is no income tax paid to be offset by a credit. In other words, most credits are considered to be “non-refundable” credits as they must offset income taxes paid to be of any benefit. However, the health care insurance credit is considered to be a “refundable” credit which does not have to offset income taxes paid, and even tax-exempt employers such as churches or ministries can potentially qualify for this credit as well. Amazingly, the health care reform act has provided for non-profit organizations to qualify for the health care credit as long as the organization has paid certain levels of employer matching contributions of Medicare tax. Before I go any further with this explanation, a short summary of the basic qualifications to qualify for the health care insurance credit are in order:
- Your church or ministry organization must offer health insurance benefits to employees and must meet certain discrimination tests to ensure that health insurance coverage is not being “selectively” offered.
- The organization must at least 50% of the cost of this coverage.
- Next, there are two complicated calculations to determine the number of full-time equivalent employees (FTE’s) that your organization employs and the “average annual wages” of these employees.
While the first two qualifying questions are easy to determine whether or not your church or ministry qualifies, the calculations of FTE’s and average annual wages for churches and ministries are anything but easy. Essentially, eligibility for the credit is based upon the number of FTE’s as measured by number of hours worked on an annual basis and the average annual wage for these employees. The FTE calculation is critically important, because if your organization has more than twenty-five (25) FTE’s you cannot qualify for the credit. However, don’t automatically assume that because you have, for example, thirty-five total employees you won’t be able to qualify. The formula for eligibility is based upon full-time equivalent employees and hours worked, so if your total employee census includes part-time employees your “FTE” total will likely be less than your total number of employees. If the total number of FTE’s is less than twenty-five and the average annual wages for these FTE’s is less than $50,000, then you may qualify for some level of credit. Additionally, churches and ministries have special issues to consider as pastoral employees and housing allowance income are subject to additional, complex rules and in effect, receive special treatment under the calculations for this credit.
Finally, to claim the refundable credit, a tax-exempt organization must file a Form 990-T with an attached Form 8941 showing the calculation of the claimed credit. The amount of the credit cannot exceed the total amount of income and/or Medicare taxes the employer is required to withhold from employee wages for the year and the employer’s share of Medicare tax on employee wages for the year. A Form 990-T is the same return that is used to report unrelated business taxable income, so some churches and ministries may already be filing this form to report unrelated business income that they receive.
Clearly, large churches and ministries will not qualify for this credit, but smaller churches and ministries need to consider whether or not they may be able to qualify. From our firm’s early assessment of the health care insurance credit, we believe that this credit could be a tremendous benefit to churches that qualify. For example, we recently worked with a mid-size church that was able to qualify for an $8,000 tax credit for the year ended December 31, 2010. I would provide a strong word of caution though that this is not a DIY (“do it yourself”) project. The rules for this credit are complex and professional advice is an absolute necessity to correctly determine both eligibility for the credit and to accurately calculate the amount of the credit to which your organization may be entitled. If your church or ministry currently offers health insurance benefits, I would strongly encourage you to check with
Mark Helland, CPA is a partner with the public accounting firm of Elliott, Dozier and Helland, PC which is located in Tulsa, Oklahoma. Mark specializes in audit and tax related issues for church and ministry clients across the United States. Mark’s firm works with hundreds of churches and ministries across the U.S. and is available for assistance on this issue. To contact Mark on this topic or for assistance on any other tax, accounting or church audit and compliance need, Mark can be contacted via email at mark@edandhcpa.com or by phone at (888) 893-1259 or (918) 488-0880.
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