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Polity Class Financial Support Services 1. Church Taxes & Finance Rev. K.Young Bae, Ph.D. CFO & Vice President of Finance Unity Worldwide Ministries (AUCI)

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Presentation on theme: "Polity Class Financial Support Services 1. Church Taxes & Finance Rev. K.Young Bae, Ph.D. CFO & Vice President of Finance Unity Worldwide Ministries (AUCI)"— Presentation transcript:

1 Polity Class Financial Support Services 1. Church Taxes & Finance Rev. K.Young Bae, Ph.D. CFO & Vice President of Finance Unity Worldwide Ministries (AUCI) (816) , Updated 9/21/2011

2 Table of Contents Church Taxes & Finance 1.Does church must apply for a tax exemption number? 2.Are churches required to file an annual report to IRS? 3. Are there any differences between GEN (Group Tax Exempt Number) and churches EIN (Employer Id number)? 4.Are churches required to send a receiving record (Thank-You Letter) to the donors? 5.How to handle Property gift? 6.Are all gifts tax deductible by donors? 7.Are all churches income tax exempt (UBI)? 8. What is an ideal Internal Control system including Offering Counting, Depositing, Signing, and so on. 9.How long churches have to keep document and records? 10.How to Read Financial Statement?

3 Table of Contents Ministers Taxes & Benefits 10.Is minister an employee or a self-employed? 11. Are all ministers incomes taxable? 12. How to handle ministers Housing Allowance? 13. How to handle churches reimbursed expenses? 14. Ministers must pay Social Security Tax? 15. What advantages ministers can have through the UWMs Pension plan?

4 1-1. Church: Tax Exemption Status Are churches required to apply tax exempt status under IRS Code 501(c)3? Churches are not required to file: Application for exemption number (Form 1023) Annual report (Form 990) (Treas.Reg ) Key: Churches do not have to apply for tax-exempt status to qualify as tax exemption organizations. Churches are exempted from paying income tax simply by operation as a church (Treas. Reg a)

5 1-2. Do we have to apply for a tax exemption number? Churches affiliated with the Association are not required to file a separate application for exemption number for IRS Code 501c3 (Form 1023). Member churches can use the Associations Group Tax Exempt Number - Umbrella # ( GEN2062) –The Association is responsible to evaluate the tax status of its affiliated churches

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7 2-1. Tax Exemption Number The Association has applied for a tax exemption number with filing the Form 1023, and received an IRS approval. –The Association Is not listed in Pub 78, Cumulative List of Organization. It is because the Association has not filed the form 990, because we are exempted from filing requirement. –However, the Association is required to file an annual report on behalf of all affiliated churches. The member churches need to make an annual report to the Association

8 2-2. Annual Membership Report to Association

9 3-1. Advantage of Tax Exemption Number Although churches are, in general, recognized as tax exempted, a church with an exemption number has several advantages. Included are: Deductible contribution by donors Reduced nonprofit mailing rate Eligible for government/foundation grant application Eligible for property & sales taxes exemption application 403(b) pension possible FUTA & SUTA taxes exemption PSA announcement possible To opt out from FICA & SECA tax, etc.

10 3-2. Employer Identification Number ? All churches must obtain an Employer Id Number (EIN) by filing Form SS-4 –An EIN is required even if the church has no employee This EIN shall be used for all payroll reports, bank account,& other reports. –A toll free (800) is available to get an EIN by a phone call, without filing the Form SS-4.

11 3-3. Form SS-4 (www.irs.ustreas.gov)

12 4-1. Gifts Acknowledgement Are churches required to send an annual receiving record to the donors at the year end? –Donors are not allowed a charitable deduction for donations of $250 or more unless the donor has a receipt from your church (Title XIII of OBRA '93 P.L ) For a single donation of $250 or more made by check, the cancelled check is not adequate substantiation Church needs to send a letter to donors before February 1(see the next slide) –A church can total all of the contribution for a donor and only show the total amount on the receipt.

13 4-2. Required Statement for all receipts Information on each gift receipt (IRS required) "No benefits were provided to you in return for your contribution other than intangible religious benefits. Please retain this letter for your tax records, since it fulfills the substantiation requirements that must be met in order to deduct your contribution." (Title XIII of OBRA '93 P.L )

14 4-3. Gifts Acknowledgement Gift receipt statement should include: 1.Description of the gifts Amount of cash, or description of property received 2.The dates the gift made and the receipt issued 3.The churchs information (name, address, etc.) 4.A statement explaining whether there are any exchanges for the gift with the church (if yes, then see the next slide) 5.The donors name

15 5-1. Quid Pro Quo Gifts A Quid pro quo gift of more than $75 (Title XIII of OBRA '93 P.L ) –A payment made partly as a contribution and partly for goods or services provided to the donor by your church. –Your church is required to provide a receipt for all transaction where the donor makes a payment to your church and receives goods or services other than intangible religious benefits One single payments of more than $75 are subject to this rule.

16 5-2. Property Gift (>$5,000) Property gift in excess of $5,000 Donors must obtain a qualified appraisal and attach it to the Form 8283 Your church needs to sign on the Form 8283 and give it back to the donors Property gift in excess of $500 but less than $5,000 Need to fill out the first page of the Form 8283 No need for appraisal and your churchs signature Car donation is subject to a different rule

17 5-3. Property Gift - Car When your church decides to sell it Church must send a statement to a donor within 30 days from the date of the car sold, showing description, date, and the sale price of the donated car. Car in excess of $500 sale price Donor needs to attach the above statement from church When church decides to keep it (or sold it to the low income earner) Donors still can claim the fair market value, based on the rule of other property donation (Form 8283).

18 5-4. Form 8283

19 5-5. Property Gift & Sale If the property gift of $ 5,000 or more is sold, exchanged, or disposed of within two years after the gift received, your church must file Form 8282 with the IRS within 125 days of the disposition. Exception: No need to report for the property gift more than $5,000 if the donor is a corporation entity.

20 5-6. Form 8282

21 6-1 Nondeductible Gifts Non-tax deductible contribution 1.Strings attached gifts (revocable with some conditions) 2.Services (professional hour, etc) - Rev Rul However, mileage is deductible 14 cents per mile for the services However, church needs to issue a statement if the annual total out-of-pocket expense including the mileage exceeds $250

22 6-2. Nondeductible Gifts How about Classes, Workshop, Speaker Events? (See IRS Pub 526, charitable Contribution ) Adult Classes (Fees or love offering) deductible if Related to church mission/activities Presenters are church ministers or staff Contributors are most likely church members Payment is made to the church Workshop, Speaker Events None of the above, then non-deductible

23 7-1 Unrelated Business Income (UBI) All church incomes are presumed to be tax exempted (IRC Sec ). Exception: The following UBIs are taxable: Not substantially related to the church mission A restaurant by paid staff, tour with social purposes A regularly operated business A church parking lot, charged for a parking fee on a regular basis Three or more transaction of the business (e.g., property sales)

24 7-2 UBI - Rental Income & Interest Income Rental income from unused spaces & Interest income from funds are not UBI Rental income to another exempt organizations (tenants) is not taxable Rental income from property with no mortgage loan is not taxable, regardless of tenants. if not mortgage-free, then 85% rule applies Churches are required to pay taxes if annual UBI gross income is more than $1,000. An excessive UBI may face revocation of exemption (UBI >50%) - TCM 566(1990)

25 7-3. Form 990-T

26 7-4 UBI - Book Store A bookstore income, if convenience of church members, is NOT UBI. For the bookstore inventory items Churches need to eliminate all unrelated items from the bookstore, or The church needs to create a separate subsidiary (a for-profit entity) if the church wants to keep unrelated items (Rev. Ruling & Reg (c)3..1(e))

27 8-1 Offering Counting - Cash receipts 5 conditions 1.At least 2 members count offerings? (pastor or treasurer be not included) 2.Verify the inside & the outside of the envelopes? 3.All checks stamped immediately after the contents verified? 4.Money counters rotated each week? 5.Donor-restricted funds properly identified during counting offerings?

28 8-2 Depositing of funds Cash receipts 3 conditions 1.Are 2 members of the offering counting team in custody of the offering until it is deposited in the bank, placed in a night depository, or in the churchs safe? 2.Are all funds promptly deposited? Compare offering and other receipt records with bank deposits. 3.Are all receipts deposited intact? Receipts should not be used to pay cash expenses.

29 9-1 DOCUMENT/RECORD RETENTION

30 10 How to Read Financial Statement Working Capital Current Ratio The Statement of Cash Flows

31 10 The Balance Sheet (Statement of Financial Position) The Main Balance Sheet Items Current Assets Cash & Securities Receivables Inventories + Fixed Assets Tangible Assets Intangible Assets Current Liabilities Payables Short-term Debt + Long-term Liabilities + Shareholders Equity (Net Assets, or Fund Balance) =

32 ASSETS Cash In Bank61,463 Bookstore Inventory24,852 PPD and Misc3,136 Total Current Assets 89,450 Building & Imprvmnt980,254 Accu-Depr(286,377)693,878 Equipment & Fix79,097 Accu Depr(64,338)14,759 Land445,592 Total Fixed Assets1,154,229 TOTAL ASSETS1,243,679 LIABILIIES & EQUITY Account Payable9,636 Other Misc1,869 Total Current Liab11,505 Long-Term Liab 465,510 Total Liab477,015 Beginning Bal839,138 Designated Fund1,424 Unrestricted RE(48,643) Net Income(25,255) Total Equity766,665 TOTAL LIABILIIES & EQUITY1,243,679

33 10-1. Working Capital Working capital is the excess of a firms current assets over its current liabilities. From the above sample WC = CA $89,450 – CL $11,505 = $77,945 Working Capital > 3 * One Month Operation ?

34 10-2. Current Ratio This ratio measures the ability of the company to pay current debts as they become due. As a rule of thumb, a current ratio of 2.0 is considered indicative of adequate liquidity. Current Ratio Current Assets Current Liabilities = For the above sample CR = CA $89,450 / CL $11,505 = 7.78

35 10 Income Statement (Statement of Activities) Revenues result from the entitys operating activities (e.g., selling merchandise). Costs and expenses are incurred in generating revenues and operating the entity. The income statement shows the profit for the period of time under consideration.

36 Income Love Offering319,144 Bookstore Income (Net)4,902 Rental Income53,413 Interest Income1,125 Program Income21,709 Others4,921 Total Income 405,214 Expense Tithe Expense28,277 SALARY/COMPENSATION EXP206,895 ADMINISTRATIVE EXPENSE32,446 Church Facilities Maintenance18,164 Insurance6,769 Mortgage Interest & Taxes22,462 Mortgage Interest & Taxes & RM (2)16,280 Utilities20,819 ADULT EDUCATION PROGRAM12,199 YOUTH EDUCATION PROGRAM9,846 STAFF/BOARD TRAIN/DEVELOP8,773 VOLUNTEER PROGRAM3,514 WORSHIP AND SANCTUARY24,469 TOTAL EXPENSES 410,911 NET INCOME -5,697

37 The Income Statement (P & L) (Statement of Operation) ABC, Inc Income Statement (year end 2006) Net Sales 26,935 COGS 10,754 Other Expenses 392 Selling, G&A expenses 10,526 Depreciation expense 1,082 EBIT4,181 Net interest expense 152 Taxable Income4,029 Income Taxes1,367 Net Income2,662

38 10-3. The Statement of Cash Flows Statement of Cash Flows (Year end 2006) Net Income 2,662 Add: Depreciation 1,082 Add: Changes in working capital Dec in A/R=26, Inc in A/P=51, Inc in Inv=(118) (41) Cash Flow from operations 3,703 Add: Cash provided by financing 1,000 Less: Capital Expenditure (500) Net Change in Cash Position 4,203

39 Polity Class Financial Support Services 2. Ministers Taxes & Benefits Rev. K.Young Bae, Ph.D. CFO & Vice President of Finance Unity Worldwide Ministries (AUCI) (816) , Updated 9/21/2011

40 Table of Contents Ministers Taxes & Benefits 10.Is minister an employee or a self-employed? 11. Are all ministers incomes taxable? 12. How to handle ministers Housing Allowance? 13. How to handle churches reimbursed expenses? 14. Ministers must pay Social Security Tax? 15. What advantages ministers can have through the UWMs Pension plan?

41 10-1. An employee or self-employed for income tax? All ministers are employees for income tax purpose (Treas , Rul ) A common-law test to determine employee or self-employed test In general, a minister is an employee if the church has the legal right to control both what and how work is done. (e.g.) A minister is an employee when the church has a right to hire/fire him/her.

42 (W-2, Box 1 or 1099 MISC, Box 7) (W-2, Box 14) 11-1 Compensation & taxes

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45 Base Salary=Gross - Manse Church Name & Address Ministers Name 11-2 Form 1099 MISC

46 12-1 Housing (Manse) Allowance Taxable? –A housing allowance is not taxable for federal income tax, but taxable for social security tax (SECA). Code 107. –A housing allowance includes cash, or a church-provided house. Can a church designate the full amount of compensation as a housing allowance? (See next screen)

47 12-2 Housing (Manse) Allowance (3 Requirements) 1.The housing allowance must be designated proactively by the church 2.Only actual expenses can be excluded from taxable income 3.The housing exclusion cannot exceed the fair rental value (Rev Ruling , 1971) Exclusion Rules (Treas. Reg b, Warren v. Commissioner 114 T.C. 2000, Ltr.Rul , )

48 12-3 Housing Allowance Worksheet

49 12-4 Housing Allowance Resolution

50 13-1 Deductible Accountable Plan The churchs reimbursement (allowance) arrangement must meet all of the following rules: 1. Expenses must have a business connection; expenses were paid or incurred while performing ministry services.

51 13-2 Deductible Accountable Plan…(continued) 2. Adequate accounting to the church for expenses with documentary evidence to verify the amount, time, place and professional purpose of each expense, and 3. Excess reimbursement must be returned to the church.

52 13-3 Deductible Accountable Plan …(continued) 4. Expenses must be substantiated within 60 days after expenses are paid or incurred. Any excess reimbursement must be returned to the church within 120 days after the expenses are paid or incurred.

53 Profit/Loss - Schedule C

54 14-1 Social Security Tax Ministers are subject to SECA tax? (Self Employment Contribution Act) All ministers pay the full 13.3% on Schedule SE (2011) The 10.4% SE Tax for salary up to $106,800 for 2011 Plus 2.9% Medicare tax on all salary above $106,800 What Income is Subject to SECA? Base salary plus housing allowance plus net earning (wedding & class income) minus all unreimbursed expenses

55 14-2 Schedule SE - Social Security Tax

56 14-3 Schedule SE - (continued...)

57 14-4 Computing SE Tax - Worksheet

58 14-5 Opting out of Social Security Exemption from SECA (Self Employment Tax). 1.To file Form 4361 by the tax return due date of the second year in which the ministerial income of $400 or more (e.g., for the class 2008, the filing due date is 4/15/2010) 2.Conscientiously oppose to public insurance because of individual religious considerations file for other than economic reasons 3.Ordaining body must be a tax-exempt organization (use Associations tax id: , GEN 2062)

59 14-6 Form 4361

60 Does a minister exempted from Social Security lose social security benefits? 1.Exemption covers only the compensation derived from service as a minister. 2.Ministers must continue to pay social security taxes for any other non-ministerial incomes even after exempted. 3.Ministers does not lose any social security benefits earned from non-ministerial services if worked more than 10 years & paid the FICA tax Social Security Exemption- Losing Benefits?

61 One Exception: a minister who opts out by filing a 4361 may not be eligible for SS Disability unless he has contributed into SS within the last 20 quarters. Example a person works from 20 until 30 years of age and contributes into SS. At 30, the person goes into the ministry and opts out of SS. If they become disabled at 36 (more than 20 quarters away from contributing into SS), they are not eligible for SS Disability or Medicare until they reach 65 for Medicare or 62 or later for SS retirement Social Security Exemption- Losing Benefits?

62 15-1 Advantages of UWMs pension plan 1.Tax saving with the Manse Allowance, which is only available through your Association. 2.Portable - no matter where you go. 3.Double watch by your Association (trustee) & custodians (administrator). 4.Cap: a.403B pretax –up to 100% of your ministry earning (after Manse) b.IRA or 401k –up to 25% your ministry earning

63 15-2 Pension Assumptions (Example) $500,000 retirement nest egg 10% yield each year upon retirement $35,000 justifiable housing allowance 30% marginal tax bracket Now lets compare …...

64 In Plan (Association) Investment $500,000 Yield 10% $50,000 Manse Allowance $35,000 Taxable Income $15,000 Tax (reduced to 15% bracket) $2,250 After tax spendable income $46,750 Out of Plan Investment $500,000 Yield $50,000 Manse not allowed Taxable Income $50,000 Tax (30% bracket) $15,000 After tax spendable income $35,000 Net advantage in plan $11,750

65 1.How much can I contribute annually? You & your church may contribute up to a total of $49,000 of "Includible Compensation" per year However, Contribution by you (payroll reduction agreement): $16,500 for : Catch Up Contribution: $5,500 for A minister's tax-free housing allowance is NOT treated as compensation Treas. Reg (d)(11)(i) and (ii) & IRS Ruling (PLR , 2001, EGTRRA 2001 Therefore, Total Pension Contribution should NOT be more than Net Salary (after housing allowance) 15-3 Pension Plan

66 Scenario C: The Dream Begin at age 45 Yearly contribution $ 7,500 Number of years 25 Rate of return 12% Total Contribution $187,500 Value at Retirement $1,000, JOIN TO THE MILLIONAIRE CLUB! The more you save, the more you earn...

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