Transcript Financial Performance

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, [email protected]
Updated 9/21/2011
Table of Contents
Church Taxes & Finance
1.
2.
3.
Does church must apply for a tax exemption number?
Are churches required to file an annual report to IRS?
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
•
2.
3.
4.
5.
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 with the church (if yes, then
see the next slide)
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 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
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 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)
7-3. Form 990-T
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
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 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
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 Liabilities
Payables
Short-term Debt
Current Assets
Cash & Securities
Receivables
Inventories
+
Fixed Assets
Tangible Assets
Intangible Assets
=
+
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
Building & Imprvmnt
Accu-Depr
Equipment & Fix
89,450
980,254
(286,377)
693,878
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
Long-Term Liab
11,505
465,510
Total Liab
Beginning Bal
Designated Fund
477,015
839,138
1,424
Unrestricted RE
(48,643)
Net Income
(25,255)
Total Equity
TOTAL LIABILIIES & EQUITY
766,665
1,243,679
10-1. Working Capital
Current assets
- Current liabilities
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
Current
Ratio
=
Current Assets
Current Liabilities
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
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.
Main Street Store, Inc.
Income Statement
For the Year Ended August 31, 2004
Net sales
Cost of goods sold
Gross profit
Selling, general, and admin. expenses
Income from operations
Interest expense
Income before taxes
Income taxes
Net income
Net income per share of common
stock outstanding
$
$
1,200,000
850,000
350,000
311,000
39,000
9,000
30,000
12,000
18,000
$
1.80
$
$
$
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
NET INCOME
410,911
-5,697
The Income Statement (P & L)
(Statement of Operation)
ABC, Inc Income Statement (year end 2006)
Net Sales
COGS
Other Expenses
Selling, G&A expenses
Depreciation expense
EBIT
Net interest expense
Taxable Income
Income Taxes
Net Income
26,935
10,754
392
10,526
1,082
4,181
152
4,029
1,367
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, [email protected]
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.
11-1 Compensation & taxes
4. PROF.
EXPENSES $8,000
3. FRINGE
BENEFIT
$ 9,000
2. MANSE
$15,000
1. BASE
SALARY
$28,000
(W-2, Box 1 or
1099 MISC, Box 7)
(W-2, Box 14)
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
MINISTER COMPENSATION SCH
1. BASE SALARY
BASE SALARY
CASH BONUS (INCENTIVE)
SOCIAL SECURITY REIMBURSEMENT
OTHERS
TOTAL BASE SALARY
AMOUNT
25,000.00
3,000.00
28,000.00
2. HOUSING (MANSE) ALLOWANCE
15,000.00
3. FRINGE BENEFITS
PENSION FUND
MEDICAL EXPENSE REIMBURSEMENT
INSURANCE PREMIUM (PAID/REIMBURSED)
TOTAL FRINGE BENFITS
3,600.00
6,000.00
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
GRAND TOTAL COMPENSATION
8,000.00
60,000.00
11-2 Form 1099 MISC
Base Salary=Gross - Manse
Church Name
& Address
Minister’s Name
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)
12-3 Housing Allowance Worksheet
Housing Allowance Schedule
(For the period of
to
Estimated
)
Actual
Housing loan principal & interest payment
Real property tax
Personal property tax on contents
Home owner's insurance
Repair & maintenance
Landscaping & gardening
Furnitures & appliances
Decoration
Utilities (gas, electiricity, water)
Trash hauling
Local telephone (base charge)
Homeowner's due/fees
Downpayment on house purchase
Real estate fees (escrow and others)
Rental payment (house/apartment)
Subtotal
5% Allowance for unexpected
estimated
Total Housing Allowance
A
actual
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.
12-4 Housing Allowance Resolution
A s s o c ia tio n o f U n it y C h u r c h e s
M a n s e A llo w a n c e R e q u e s t /A p p r o v a l F o r m
U n d e r § 1 0 7 o f th e IR S C o d e , th e A s s o c ia tio n m a y p r o v id e , a s p a r t o f a M in is te r ’ s
p e n s io n c o m p e n s a tio n , a “ M a n s e a llo w a n c e . ” T h is f o r m is b e in g p r o v id e d to y o u , a s a
U n it y m in is te r , to d e te r m in e th e a m o u n t o f y o u r h o u s in g a llo w a n c e , w h ic h m a y b e
e x c lu d ib le f r o m y o u r a n n u a l g r o s s in c o m e . P le a s e c o m p le te th e s e c tio n b e lo w in o r d e r to
a s s is t in m a k in g a n a p p r o p r ia te d e te r m in a tio n . Y o u m a y a ls o a tta c h a s e p a r a te p a g e
p r o v id in g a d d itio n a l d e ta il o r a n y c o m m e n ts th a t y o u f e e l m a y b e h e lp f u l in a r r iv in g a t a
c o r r e c t a llo w a n c e .
C O M P U T A T IO N O F P A R S O N A G E A L L O W A N C E
C u rren t 1 2 M o n th s
1.
2.
3.
4.
5.
6.
7.
8.
P r o v id e d b y Y o u
C h u rch U se
R e n t o r p r in c ip a l p a y m e n ts
T axes
I n te r e s t
In su ran ce
R e p a ir s & U p k e e p
F u r n it u r e , a p p lia n c e s , e tc .
D e c o r a to r ite m s
M is c e lla n e o u s s u p p lie s
T o ta ls :
T h e A s s o c ia tio n o f U n it y C h u r c h e s , a q u a lif ie d o r g a n iz a tio n p u r s u a n t to th e p r o v is io n s o f
§ 1 0 7 o f th e IR S C o d e , d o e s h e r e b y d e s i g n a te a m o u n ts a s q u a lif y in g f o r e x c lu s io n u n d e r
§ 1 0 7 o f th e C o d e . T h e s p e c if ic a m o u n t s o q u a lif y in g f o r e x c lu s io n u n d e r § 1 0 7 o f th e
C o d e , w ith r e s p e c t to a n y p a r tic u la r m in is te r , is to b e d e t e r m in e d b y th e b o a r d a n d s h a ll
b e d e s ig n a te d in th e o f f ic ia l c h u r c h r e c o r d s .
( P r in te d ) N a m e o f M in is te r _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
S ig n a tu r e o f M in is te r
__________________________
( P r in te d ) P r e s id e n t
__________________________
S ig n a tu r e o f P r e s id e n t
__________________________
D a te S i g n e d _ _ _ _ _ _ _ _ _ _ _ _
D a te S ig n e d _ _ _ _ _ _ _ _ _ _ _
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: 440668175, GEN 2062)
14-6 Form 4361
14-7 Social Security ExemptionLosing Benefits?
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.
14-8 Social Security ExemptionLosing 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.
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
$500,000
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)
After tax
spendable income
Net advantage in plan $11,750
$15,000
$35,000
15-3 Pension Plan
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)
15-4. JOIN TO THE MILLIONAIRE CLUB!
The more you save,
the more you earn . . .
Scenario C:
$1,000,000
$900,000
$800,000
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
Begin at age
Yearly contribution
Number of years
Rate of return
“The Dream”
$1,000,004
45
$ 7,500
25
12%
Total Contribution
$187,500
Value at Retirement $1,000,004
$187,500
Total Contributed
Value at Retirement