Issues of Concern to Ministers

1. Issues of Concern to Ministers

2. Ministerial Issues • Who is a Minister? • Administers the sacraments • Conducts religious worship • Management responsibility in church • Considered a religious leader by church • Ordained, commissioned or licensed

3. Ministerial Issues • What is included in a Minister’s taxable compensation? • Base salary • Personal use of Church provided auto • Non accountable exp reimbursements • Social Security supplement • Special occasion “gifts” from Church • Unrestricted Minister’s discretionary fund • Bargain purchases of Church property • Group term life ins premiums >$50,000

4. Ministerial Issues • What are non taxable fringe benefits? • Parsonage or housing allowance • Group term life ins premium <$50,000 • Medical insurance premiums • 403(b)/401(k) • Accountable reimbursement plan • Section 125 plan

5. Ministerial Issues • Special tax & reporting rules • Eligibility for housing allowance • Self-employed status - Social Security • Exemption from automatic FITW • Eligibility to opt out of SE tax • “Double Deduction” issue

6. Ministerial Issues • Dual Tax Status • Common law employee of the Church • Self-employed with respect to Social Security taxes

7. Ministerial Issues • Federal Income Taxes • Ministers are exempt from mandatory withholding of federal income tax • Ministers may elect to have withholding of their federal income taxes by completing Form W-4 • Withholding vs estimated taxes • Dollars look like they have been there all year • No late payment penalties due to late estimates

8. Ministerial Issues • Form 4361-Application for Exemption from Self Employment Tax • Minister must be opposed to public insurance based on religious beliefs and not for financial reasons • Must file form by the due date including extensions of the 2nd tax year in which the Minister had at least $400 of net earnings from self-employment

9. Ministerial Issues • What is the “double deduction”? • Ministers who own their homes and who itemize may deduct mortgage interest and real estate taxes on Sch A even though the income is excluded per IRC Section 107.

10. Ministerial Issues • Housing Allowance • Board approval in advance • When should housing allowance be reviewed during the year • 3-point test • Board approved • Actual housing spent • Fair rental value of home fully furnished plus utilities

11. Ministerial Issues • Housing Allowance (cont’d) • When should a home be purchased? • Is housing allowance subject to self-employment tax? • How much compensation can be designated as housing allowance? • High housing allowance? Get an appraisal for documentation.

12. Ministerial Issues • What constitutes housing allowance? • Rent paid for housing • Interest expense included in mortgage • Principal portion of home mortgage • Real estate taxes on the home • Insurance on the home and contents • Cost of all furnishings • Assessments by government • Utilities

13. Ministerial Issues • What constitutes housing allowance? • Telephone line • Repairs and maintenance of home • Down payment on the home • Costs of purchasing the home • Cost of maintenance tools/equipment • Pest control • Routine cleaning • Firewood • Domestic items

14. Ministerial Issues • What happens if a Minister does not spend all of his/her housing allowance on housing expenses? • Excess should be reported as income on Minister’s tax return.

15. Ministerial Issues • Housing allowance example #1 #2 Authorized housing 10,000 30,000 Actual housing expenses 12,000 32,000 FRV plus utilities 24,000 24,000 #1 limited to amount authorized - $10,000 #2 limited to FRV plus utilities - $24,000

16. Ministerial Issues • Other Housing Allowance Issues • Owning two homes • Amending housing allowance • Limits on housing allowance • Retired ministers

17. Ministerial Issues • Taxable income • Love offerings • Sabbatical income • Discretionary funds

18. Ministerial Issues • What is an “accountable” plan? • EE reports to Church rather than to IRS • Reimbursements are not income to EE • EE cannot claim any deduction on Form 1040 • Plan must meet four requirements • Only business exp reimbursement • Must provide adequate documentation • Not more than 60 days after exp incurred • Excess reimbursement returned • Not more than 120 days after paid • Church cannot reduce EE’s salary

19. Ministerial Issues • Advantages of an accountable reimbursement plan • Avoids including the reimbursement in the taxable income of the employee • Avoids the possibility that the employee will be unable to deduct expenses because of the standard deduction • Avoids the expense reduction caused by the Deason allocation rule • Avoids the statutory 50% reduction for M/E • Avoids 2% of AGI floor on Schedule A

20. Ministerial Issues • Deason Rule-1964 (Dalan Decision 1992) • Unreimbursed business expenses • Limited by housing allowance over total compensation • Example • Total income 40,000 • Housing allowance 10,000 • Nontaxable % 25% • Unreimbursed bus exp 4,000 • Nondeductible bus exp 1,000

21. Ministerial Issues • Self employment tax • Example • Salary 30,000 • Housing allowance 10,000 • Unreimbursed bus exp (4,000) • SE taxable income 36,000

22. Ministerial Issues • What is the most important asset of Watermark Community Church? • Exempt status • How do you protect this status? • Follow the rules/laws • Document everything • Remember Church’s fiduciary responsibility

23. Ministerial Issues • Summary • Monitor FITW/estimated tax payments • Review H/A throughout the year • Plan major purchases • Use Church’s accountable plan • Safeguard Church’s exempt status

24. Ministerial Issues • Contact information • Julie Fry, CPA • Salmon Sims Thomas & Associates PLLC • 12720 Hillcrest Road, Suite 900 • Dallas, TX 75230 • 972.392.1143