Tax Q & A’s for Churches and Ministries
Mark Helland, C.P.A.

Mark Helland, CPA is a partner with the public accounting firm Elliott, Dozier and Helland, PC (www.edhcpa.com) which is located in Tulsa, Oklahoma. Mark’s practice focuses on the unique needs of non-profits and he specializes in outsourced accounting, compliance and tax related issues for church and ministry clients across the United States. For further assistance from Mark on these services, Mark can be contacted via email at mark@edhcpa.com or by phone at (918) 627-2286. You can also connect with Elliott, Dozier and Helland and get updates via social media at Facebook.com/hellandcpa, Linkedin.com/in/hellandcpa and Twitter.com/hellandcpa.

Questions with common themes tend to come up from time to time in the day-to-day operations of churches and ministries. I thought it would be helpful for my tax and accounting article this month to focus on some frequently asked questions that can be tricky to navigate correctly.

Question: I have volunteered as the church bookkeeper for many years and have never received any payment as a volunteer. Recently our pastor decided that they wanted to show their appreciation to me my giving me a gift. They would prefer not to put me on staff with a salary, but they wanted to show their appreciation for the services I have provided. They did not wish for this to be a tax burden for me personally, but I am fairly certain that is not possible. Am I correct in thinking that I will need a 1099 at the end of the year to account for this gift?

Answer: It is very important for churches and ministries to understand that just calling something a “gift” or a “love offering” to employees or volunteers does not magically make these types of payments escape taxation. In the above scenario, an IRS Form 1099 would be required for all payments in excess of $600 to individuals who are not employees and this would be considered to be taxable income to be declared on the tax return of the recipient. An additional item to consider in this scenario is that the appropriate treatment for this 1099 would be to code the amount as “non-employee compensation.” The downside to the 1099 being coded this way is that the income for the recipient would then be subject to self-employment tax, essentially FICA and Medicare times two (a total of 15.3%) in addition to regular federal and state income taxes.

The only way around the self employment tax burden would be for the church to treat the individual as an employee and issue a W-2 for this income, with the church then absorbing the employer’s share of FICA and Medicare. However, an employee arrangement brings on a host of other issues that would then need to be considered.

Question: A member of our church has a business and did some work for us recently. She charged us significantly less than the normal cost for the products and had asked about the discount being considered a contribution to the church. Can she count the difference between the normal cost of the materials and the discounted cost as a contribution?

Answer: This issue comes up often and business owners frequently don’t understand that what they are asking would basically amount to deducting their “cost” twice. In other words, the cost of materials on the project is already a deduction for their business that they have paid for with business funds. If the IRS code then allowed the business owner to claim a charitable deduction for the value of the discount or loss on donated materials, this would amount to a double deduction of the cost of the same item. So, the answer in this case is no – the church cannot consider discounted materials, discounted time or the value of a person’s services to be a charitable donation. Non-cash donations of certain physical goods are a separate issue beyond the scope of this article and professional advice is necessary when dealing with these situations.

Question: Our Church has various ways of reimbursing staff for use of vehicles. Can pastors be reimbursed for periodic gas tank filling? Also, can we provide certain staff members with a gas card?

Answer: In our audit practice, we find that vehicle usage is one of the most significantly abused areas. If the IRS were to audit most churches, they would find a significant amount of abuse in this area alone. Because this area is so confusing and so mistreated, one of my upcoming articles will address this specific issue in detail – i.e. the three primary ways that a church can provide for the expenses of operating a motor vehicle. As a general answer to this question – a church cannot simply gas up the personal vehicles of employees. The only situation in which a vehicle’s “actual expenses” (gas, repairs, insurance, etc.) can be paid for directly with church or ministry funds is if the vehicle is owned by and titled in the name of the church or ministry. So, gas cards would fall under the previous example – if the vehicle is owned by the church or ministry this would be appropriate but gas cards should never be used to fuel vehicles not owned by the organization.

In the case of vehicles owned by employees of the church or ministry, usage of a personal vehicle can be reimbursed using the mileage method but must be done using an “accountable reimbursement” plan. Under this type of arrangement, the employee submits a log of miles driven, dates of the trips and business purpose and then is eligible to be reimbursed. Again, more to come on this sometimes complicated issue in an upcoming article.

 

This article is designed to provide accurate and authoritative information in regard to the subject matter covered. It is shared with the understanding that neither the author nor Tony Cooke Ministries is engaged in rendering legal, accounting, psychological, medical or other professional services. Laws and regulations are continually changing, and can vary according to location and time. No representation is made that the information herein is applicable for all locations and times. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

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