Polity Class Financial Support Services 1. Church Taxes & Finance

1. Polity Class Financial Support Services1. 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

2. Table of ContentsChurch Taxes & Finance • Does church must apply for a tax exemption number? • 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)? • Are churches required to send a receiving record (Thank-You Letter) to the donors? • How to handle Property gift? • Are all gifts tax deductible by donors? • Are all churches income tax exempt (UBI)? • 8. What is an ideal Internal Control system including Offering Counting, Depositing, Signing, and so on. • How long churches have to keep document and records? • How to Read Financial Statement?

3. Table of ContentsMinisters 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?

4. 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) 1-1. Church: Tax Exemption Status

5. 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 1-2. Do we have to apply for a tax exemption number?

7. 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 2-1. Tax Exemption Number

8. 2-2. Annual Membership Report to Association

9. 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. 3-1. Advantage of Tax Exemption Number

10. 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. 3-2. Employer Identification Number ?

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

12. 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. 4-1. Gifts Acknowledgement

13. 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) 4-2. Required Statement for all receipts

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

15. 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. 5-1. Quid Pro Quo Gifts

16. 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 5-2. Property Gift (>$5,000)

17. 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). 5-3. Property Gift - Car

18. 5-4. Form 8283

19. 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. 5-5. Property Gift & Sale

20. 5-6. Form 8282

21. Non-tax deductible contribution Strings attached gifts (revocable with some conditions) 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 6-1 Nondeductible Gifts

22. 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 6-2. Nondeductible Gifts

23. 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) 7-1 Unrelated Business Income(UBI)

24. 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) 7-2 UBI - Rental Income & Interest Income

25. 7-3. Form 990-T

26. 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 8706012 & Reg 1.501 (c)3..1(e)) 7-4 UBI - Book Store

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

28. 3 conditions 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? Are all funds promptly deposited? Compare offering and other receipt records with bank deposits. Are all receipts deposited intact? Receipts should not be used to pay cash expenses. 8-2 Depositing of fundsCash receipts

29. 9-1 DOCUMENT/RECORD RETENTION

30. 10 How to Read Financial Statement • 10-1. Working Capital • 10-2. Current Ratio • 10-3. The Statement of Cash Flows

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

33. 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 ?

34. Current Ratio Current Assets Current Liabilities = 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. For the above sample CR = CA $89,450 / CL $11,505 = 7.78

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

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 • EBIT 4,181 • Net interest expense 152 • Taxable Income 4,029 • Income Taxes 1,367 • Net Income 2,662

38. 10-3. The Statement of Cash Flows • Statement of Cash Flows (Year end 2006) • Net Income2,662 • 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 Services2. 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

40. Table of ContentsMinisters 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?

41. 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.

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

45. 11-2 Form 1099 MISC Base Salary=Gross - Manse Church Name & Address Minister’s Name

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) The housing allowance must be designated proactively by the church Only actual expenses can be excluded from taxable income 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)

48. 12-3 Housing Allowance Worksheet

49. 12-4 Housing Allowance Resolution

50. 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.