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					       Polity Class
Financial Support Services
1. Church Taxes & Finance

  Rev. K.Young Bae, Ph.D.
CFO & Vice President of Finance
 Association of Unity Churches
(816) 524-7414, young@unity.org

          Updated 3/6/2008
           1. Church Taxes & Finance

• AUCI provides a Group Tax Exemption
  Number (GEN 2062) to member churches
• AUCI provides consulting services to our
  member churches on Church Taxes,
  Church Finances, and Human Resources.
• AUCI provides a Group Pension Service
  and Church Liability Insurance Discount
  Benefits to member churches.
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)
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
     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
 Annual Membership
Report to Association
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.
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.
Form SS-4 (www.irs.ustreas.gov)
     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.
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)
Gifts Acknowledgement
 • Gift receipt statement
   should include:
    – The donor’s name
    – 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 with
      the church (if yes, then see
      the next slide)
                      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.
                         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
                    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).
Form 8283
                       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.
Form 8282
                      Nondeductible
                        Gifts
• 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
                        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
   – IRS publication 526, Charitable Contribution
     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)
    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)
Form 990-T
                   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))
         Offering Counting - Cash
    • 5 conditions
                   receipts
• 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?
                   Depositing of funds
  – 3 conditions
                       Cash receipts
• 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.
         Polity Class
  Financial Support Services
2. Ministers Taxes & Benefits




    Rev. K.Young Bae, Ph.D.
CFO & Vice President of Finance
    Association of Unity Churches
 (816) 524-7414, young@unity.org
             Updated 3/6/2008
          2. Ministers Taxes & Benefits

• AUCI provides consulting services on
  Ministers’ Tax and Benefits.
• AUCI approves and administers Retired
  Ministers’ Manse Allowance request
• Member ministers can opt out from the
  social security tax with using the AUCI’s
  Group Tax Exemption number.
           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.
       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
              Compensation & taxes
                              4. PROF.
                             EXPENSES $8,000
                     3. FRINGE                                     1. BASE
                      BENEFIT                                      SALARY
                         $ 9,000                                        $28,000
                                                                (W-2, Box 1 or
                              2. MANSE                          1099 MISC, Box 7)
                                 $15,000
                           (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
Form W-2
Base Salary=Gross - Manse


                    $
                   Blank
                   Blank




               $




                   Manse
         Form 1099 MISC
                  Base Salary=Gross - Manse


   Church Name
   & Address



Minister’s Name
                     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)
              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)
                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          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.
                        Housing Allowance
                           Resolution
                      Association of Unity Churches
                  Manse Allowance Request/Approval Form

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


COMPUTATION OF PARSONAGE ALLOWANCE                      Provided by You    Church Use
Current 12 Months
1. Rent or principal payments
2. Taxes
3. Interest
4. Insurance
5. Repairs & Upkeep
6. Furniture, appliances, etc.
7. Decorator items
8. 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 the
Code, with respect to any particular minister, is to be determined by the board and shall
be designated in the official church records.


(Printed) Name of Minister __________________________

Signature of Minister      __________________________         Date Signed ____________


(Printed) President        __________________________

Signature of President     __________________________         Date Signed ___________
           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.
    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.
       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
              Social Security Tax
• Ministers are subject to SECA tax?
 (Self Employment Contribution Act)

  – All ministers pay the full 15.3% on
    Schedule SE
     • The 15.3% for salary up to $102,000 for 2008
     • Plus 2.9% tax on all salary above $102,000

• What Income is Subject to SECA?
  – Base salary plus housing allowance plus
    net earning (wedding & class income)
    minus all unreimbursed expenses
Schedule SE - Social
   Security Tax
Schedule SE - (continued...)
Computing SE Tax -
   Worksheet
Opting out of Social Security
• Exemption from SECA                   (Self Employment Tax).

  – 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)
  – conscientiously oppose to public
    insurance because of individual religious
    considerations
  – file for other than economic reasons
  – ordaining body must be a tax-exempt
    organization (use Association’s tax id: 44-
    0668175, GEN 2062)
Form 4361
                Social Security
              Exemption- Losing
                  Benefits?
• Does a minister exempted from Social
  Security lose social security benefits?
  – Exemption covers only the compensation
    derived from service as a minister.
  – Ministers must continue to pay social security
    taxes for any other non-ministerial incomes
    even after exempted.
  – 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?
• 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.
Advantages of Association’s pension
               plan
           • Tax saving with the manse
             allowance, which is only
             available through your
             Association.
           • Portable - no matter
             where you go.
           • Double “watch” by your
             Association (trustee) &
             custodians
             (administrator).
             – For more details, please visit to
               www.unity.org.
Pension Assumptions

     • $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)             Out of Plan
Investment                   Investment
   $500,000                     $500,000
Yield 10%                    Yield
   $50,000                      $50,000
Manse Allowance              Manse not allowed   --
   $35,000                      ---
Taxable Income               Taxable Income
   $15,000                      $50,000
Tax (reduced to
  15% bracket)               Tax (30% bracket)
       $2,250                   $15,000
           Net advantage in plan $11,750
After tax                    After tax
                      Pension Plan
• How much can I contribute annually?
   – You & your church may contribute up to a total of $40,000 of
     "Includible Compensation" per year
   – However, Contribution by you (payroll reduction agreement):
     $15,300 for 2008
   – 50+: Catch Up Contribution: $5,000 for 2008
• 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)
JOIN TO THE MILLIONAIRE CLUB!
      The more you save,
          the more you earn . . .
              Scenario C:                 “The Dream”
                                                           $1,000,004
 $1,000,000
              Begin at age                        45
  $900,000    Yearly contribution             $ 7,500
  $800,000    Number of years                      25
  $700,000    Rate of return                     12%
  $600,000
  $500,000    Total Contribution   $187,500
              Value at Retirement $1,000,004
  $400,000
  $300,000               $187,500
  $200,000
  $100,000
         $0
                      Total Contributed                 Value at Retirement