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) 524-7414, young@unity.org

Updated 9/21/2011

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?

Table of Contents Ministers Taxes & Benefits

10. Is minister an employee or a self-employed?

11. Are all minister’s incomes taxable?12. How to handle minister’s Housing

Allowance?13. How to handle churches’ reimbursed

expenses?14. Ministers must pay Social Security Tax?15. What advantages ministers can have

through the UWM’s Pension plan?

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. 1.6033-2)

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.1.511-2a)

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 Association’s Group Tax Exempt Number - Umbrella # (44-0668175 GEN2062)– The Association is responsible to evaluate

the tax status of its affiliated churches

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

2-2. Annual Membership Report to Association

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.

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) 829-4933 is available to get an EIN by a phone call, without filing the Form SS-4.

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

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. 103-66)

• 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.

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. 103-66)

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 issued3. The church’s 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 donor’s name

5-1. Quid Pro Quo Gifts

A Quid pro quo gift of more than $75 (Title

XIII of OBRA '93 P.L. 103-66) – 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.

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 church’s

signature

Car donation is subject to a different rule

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).

5-4. Form 8283

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.

5-6. Form 8282

6-1 Nondeductible Gifts

Non-tax deductible contribution 1. Strings attached gifts (revocable with some

conditions)2. Services (professional hour, etc) - Rev Rul. 67-

236 • 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

6-2. Nondeductible GiftsHow 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

7-1 Unrelated Business Income (UBI)

All church incomes are presumed to be tax exempted (IRC Sec 511-13).

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)

7-2 UBI - Rental Income & Interest Income

Rental income from unused spaces & Interest income from funds are not UBIRental income to another exempt organizations

(tenants) is not taxableRental 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)

7-3. Form 990-T

7-4 UBI - Book Store

A bookstore income, if convenience of church members, is NOT UBI.

For the bookstore inventory itemsChurches need to eliminate all unrelated

items from the bookstore, orThe church needs to create a separate

subsidiary (a for-profit entity) if the church wants to keep unrelated items (Rev. Ruling 8706012 & Reg 1.501 (c)3..1(e))

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?

8-2 Depositing of funds Cash receipts

3 conditions1. 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 church’s 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.

9-1 DOCUMENT/RECORD RETENTION

10 How to Read Financial Statement

10-1. Working Capital

10-2. Current Ratio

10-3. The Statement of Cash Flows

10 The Balance Sheet(Statement of Financial Position)

The Main Balance Sheet Items

Current AssetsCash & SecuritiesReceivablesInventories

+

Fixed AssetsTangible AssetsIntangible Assets

Current LiabilitiesPayablesShort-term Debt

+

Long-term Liabilities

+Shareholders’ Equity (Net Assets, or Fund Balance)

=

ASSETS

Cash In Bank 61,463

Bookstore Inventory 24,852

PPD and Misc 3,136

Total Current Assets 89,450

Building & Imprvmnt 980,254

Accu-Depr (286,377) 693,878

Equipment & Fix 79,097

Accu Depr (64,338) 14,759

Land 445,592 445,592

Total Fixed Assets 1,154,229

TOTAL ASSETS 1,243,679

LIABILIIES & EQUITY

Account Payable 9,636

Other Misc 1,869

Total Current Liab 11,505

Long-Term Liab 465,510

Total Liab 477,015

Beginning Bal 839,138

Designated Fund 1,424

Unrestricted RE (48,643)

Net Income (25,255)

Total Equity 766,665

TOTAL LIABILIIES & EQUITY 1,243,679

10-1. Working Capital

Working capital is the excess of a firm’s 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 ?

10-2. Current Ratio

This ratio measures the abilityof 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.

CurrentRatio

Current Assets Current Liabilities

=

For the above sampleCR = CA $89,450 / CL $11,505 = 7.78

10 Income Statement (Statement of Activities)

Net sales 1,200,000$ Cost of goods sold 850,000 Gross profit 350,000$ Selling, general, and admin. expenses 311,000 Income from operations 39,000$ Interest expense 9,000 Income before taxes 30,000$ Income taxes 12,000 Net income 18,000$

Net income per share of common stock outstanding 1.80$

Main Street Store, Inc.Income Statement

For the Year Ended August 31, 2004

Revenues result from the entity’s

operating activities (e.g., selling

merchandise).

Revenues result from the entity’s

operating activities (e.g., selling

merchandise).

Costs and expenses are

incurred in generating

revenues and operating the

entity.

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.

The income statement shows the profit for the period of time under consideration.

Income  

Love Offering 319,144

Bookstore Income (Net) 4,902

Rental Income 53,413

Interest Income 1,125

Program Income 21,709

Others 4,921

Total Income 405,214

Expense

Tithe Expense 28,277

SALARY/COMPENSATION EXP 206,895

ADMINISTRATIVE EXPENSE 32,446

Church Facilities Maintenance 18,164

Insurance 6,769

Mortgage Interest & Taxes 22,462

Mortgage Interest & Taxes & RM (2) 16,280

Utilities 20,819

ADULT EDUCATION PROGRAM 12,199

YOUTH EDUCATION PROGRAM 9,846

STAFF/BOARD TRAIN/DEVELOP 8,773

VOLUNTEER PROGRAM 3,514

WORSHIP AND SANCTUARY 24,469

TOTAL EXPENSES 410,911

NET INCOME -5,697

The Income Statement (P & L) (Statement of Operation)

ABC, Inc Income Statement (year end 2006)

Net Sales 26,935COGS 10,754Other Expenses 392Selling, G&A expenses 10,526Depreciation expense 1,082EBIT 4,181Net interest expense 152Taxable Income 4,029Income Taxes 1,367Net Income 2,662

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

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) 524-7414, young@unity.org

Updated 9/21/2011

Table of Contents Ministers Taxes & Benefits

10. Is minister an employee or a self-employed?

11. Are all minister’s incomes taxable?12. How to handle minister’s Housing

Allowance?13. How to handle churches’ reimbursed

expenses?14. Ministers must pay Social Security Tax?15. What advantages ministers can have

through the UWM’s Pension plan?

10-1. An employee or self-employed for income tax?

All ministers are employees for income tax purpose (Treas. 31-3401, Rul. 80-110)

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.

1. Base Salary -------->Taxable for both Income & Self-Employed Social Security Tax

2. Manse----------------->Nontaxable for Income Tax, but Taxable for Self-Employed Social Security Tax

3. Fringe Benefits----> Non-taxable for Income and Social Security Tax if Accountable Plan (See Next)

4. Professional Expenses Reimbursement-----> Non Taxable if Accountable Plan

1. BASE SALARY

2. MANSE

3. FRINGE BENEFIT

4. PROF. EXPENSES

$28,000

$15,000

$8,000

$ 9,000(W-2, Box 1 or1099 MISC, Box 7)

(W-2, Box 14)

11-1 Compensation & taxes

MINISTER COMPENSATION SCH

1. BASE SALARY AMOUNT BASE SALARY 25,000.00 CASH BONUS (INCENTIVE) SOCIAL SECURITY REIMBURSEMENT 3,000.00 OTHERS

TOTAL BASE SALARY 28,000.00

2. HOUSING (MANSE) ALLOWANCE 15,000.00

3. FRINGE BENEFITS PENSION FUND 3,600.00 MEDICAL EXPENSE REIMBURSEMENT INSURANCE PREMIUM (PAID/REIMBURSED) 6,000.00

TOTAL FRINGE BENFITS 9,000.00

4. PROFESSIONAL EXPENSE REIMBURSEMENT AUTO (CAR) ALLOWANCE 3,600.00 BOOKS/TAPES/DUES 1,200.00 CONVENTION/CONFERENCE 2,000.00 CONTINUING EDUCATION 1,200.00 CHURCH RELATED MEALS/MEETING

TOTAL PROFESSIONAL EXPENSES REIMBURSEMENT 8,000.00

GRAND TOTAL COMPENSATION 60,000.00

Base Salary=Gross - Manse

Church Name& Address

Minister’s Name

11-2 Form 1099 MISC

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)

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 71-280, 1971)

• Exclusion Rules (Treas. Reg. 1.107-1b, Warren v. Commissioner 114 T.C. 2000, Ltr.Rul.8937025, 835005)

Housing Allowance Schedule (For the period of to )

Estimated ActualHousing loan principal & interest paymentReal property taxPersonal property tax on contentsHome owner's insuranceRepair & maintenanceLandscaping & gardeningFurnitures & appliancesDecoration Utilities (gas, electiricity, water)Trash haulingLocal telephone (base charge)Homeowner's due/feesDownpayment on house purchaseReal estate fees (escrow and others)Rental payment (house/apartment)

Subtotal

5% Allowance for unexpectedestimated actual

Total Housing Allowance A B

* The estimated amount (A) must be approved by the church board, proactively in writing .* The final excludable amount shall be the lowest amount of the above A, B, and the fair value.

12-3 Housing Allowance Worksheet

Association of Unity ChurchesManse Allowance Request/Approval Form

Under §107 of the IRS Code, the Association may provide, as part of a Minister’spension compensation, a “Manse allowance.” This form is being provided to you, as aUnity minister, to determine the amount of your housing allowance, which may beexcludible from your annual gross income. Please complete the section below in order toassist in making an appropriate determination. You may also attach a separate pageproviding additional detail or any comments that you feel may be helpful in arriving at acorrect allowance.

COMPUTATION OF PARSONAGE ALLOWANCECurrent 12 Months

Provided by You Church Use

1. Rent or principal payments2. Taxes3. Interest4. Insurance5. Repairs & Upkeep6. Furniture, appliances, etc.7. Decorator items8. Miscellaneous supplies

Totals:

The Association of Unity Churches, a qualified organization pursuant to the provisions of§107 of the IRS Code, does hereby designate amounts as qualifying for exclusion under§107 of the Code. The specific amount so qualifying for exclusion under §107 of theCode, with respect to any particular minister, is to be determined by the board and shallbe designated in the official church records.

(Printed) Name of Minister __________________________

Signature of Minister __________________________ Date Signed ____________

(Printed) President __________________________

Signature of President __________________________ Date Signed ___________

12-4 Housing Allowance Resolution

13-1 Deductible Accountable Plan

The church’s 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.

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.

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.

Profit/Loss - Schedule C

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

14-2 Schedule SE - Social Security Tax

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

14-4 Computing SE Tax - Worksheet

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 Association’s tax id: 44-0668175, GEN 2062)

14-6 Form 4361

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.

14-7 Social Security Exemption- Losing Benefits?

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.

14-8 Social Security Exemption- Losing Benefits?

15-1 Advantages of UWM’s 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

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 let’s compare …...

In Plan (Association)Investment $500,000Yield 10% $50,000Manse Allowance $35,000Taxable Income $15,000Tax (reduced to 15% bracket) $2,250After tax spendable income $46,750

Out of PlanInvestment $500,000Yield $50,000Manse not allowed -----Taxable Income $50,000

Tax (30% bracket) $15,000After tax spendable income $35,000

Net advantage in plan $11,750

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 2011

50+: Catch Up Contribution: $5,500 for 2011

2. A minister's tax-free housing allowance is NOT treated as compensation

• Treas. Reg. 1.415-2(d)(11)(i) and (ii) & IRS Ruling (PLR 200135045, 2001, EGTRRA 2001

Therefore, Total Pension Contribution should NOT be more than Net

Salary (after housing allowance)

15-3 Pension Plan

$187,500

$1,000,004

$0$100,000

$200,000$300,000$400,000$500,000

$600,000$700,000$800,000

$900,000$1,000,000

Total Contributed Value at Retirement

Scenario C: “The Dream”

Begin at age 45Yearly contribution $ 7,500Number of years 25Rate of return 12%

Total Contribution $187,500Value at Retirement $1,000,004Value at Retirement $1,000,004

15-4. JOIN TO THE MILLIONAIRE CLUB! The more you save,

the more you earn . . .