Many churches think that their state sales tax exemption applies to ALL TRANSACTIONS.
Unfortunately, this is not the case. An exemption from sales taxes only allows the church to avoid taxes on goods and services that it purchases in carrying out its mission. It does not apply to things that it might sell!
There is not necessarily a need to panic if you haven’t been collecting and remitting sales taxes. First, you simply need to educate yourself about how the sales tax process works and see if any of the many exemptions from the tax apply.
For example, in Texas, where I live, the list is long of possible exemptions:
Meal and food products sold at church functions. (Whew! Wednesday night suppers are safe!)
Annual banquets
Auctions, rummage sales and other fundraisers
One day sales
Membership dues
Publication fees if published and distributed by the church
These are just a few, and only apply in Texas. Although many of the states operate in a similar fashion, there are differences from state to state. If you are selling stuff, and haven’t thought about taxes, it may be time to give your tax professional a call.
Many churches ignore or do not understand what unrelated business income is.
Very often one of our church clients will call us concerned that they have received unrelated business income. The vast majority of the calls are concerned with the sale of an asset or the rental of their facilities. After giving me the details of what they have done they usually ask, “Are we going to lose our tax exemption?”
In most cases the answer to this question is no because the purpose of the unrelated business income tax is not to punish exempt organizations who engage in unrelated activities. The main purpose is to simply collect taxes! Unless an unrelated activity becomes so large that it is the dominant activity a charity is engaged in, tax exempt status is safe.
The best way to understand the rules is to look closely at the words unrelated and business. Unrelated means activities not directly connected with a church’s defined mission or purpose. So, in the case of casual sales of property, the church has definitely received some “unrelated” income. But, we need to look at the second word, “business”. This word implies that an activity is regularly carried on. In other words, the church is holding itself out as operating a business on an ongoing basis. Very few churches generate this type of income. A few examples are restaurants that are open to the public and parking lot and garage fees.
Rents, by definition are NOT considered unrelated business income, unless the church happens to be renting a facility that was purchased with a mortgage. Even then, there are a myriad of loopholes that may allow the church to escape taxation.
But, even if a church does generate unrelated business income, there is nothing to worry about unless the activity dwarfs the church’s main exempt purpose. The tax code is simply trying to level the competitive playing field. If a church is entering the market place, it should have to pay taxes just like its competitors.
Operating without an annual budget
In fairness, there are very few churches that do not have some form of budget. The key words in this caption are “operating without”. The main point here is that even though most churches do have some type of budget written on paper, far too many operate as if they did not have one or misuse the one they do have.
Historically, church budgets have had a two-fold purpose.
First, they fill a financial role helping to make sure the church stays within acceptable and approved spending parameters.
KEY: The pendulum swings pretty wide in regard to church mismanagement of budgets. Some churches completely ignore the budget once it is approved begging the question, “Why have one to begin with?”
Other churches let their budget become a straight jacket, leading to some unfortunate results:
“Stingy” finance committee/team members may refuse to allow their church to begin new ministries because “This is not in the budget!” I have seen situations where churches have missed out on great ministry opportunities because they “postponed” them until the end of the year when the new venture could “be budgeted”. This in spite of the fact that the church had ample cash in reserve to fund the new project.
Occasionally a church staff may be intimidated by finance team members and are fearful of overspending a budget line item. But, due to their belief that a project is essential, go ahead and authorize expenditures. To cover their tracks, the expenditures are not included in the budget but are classified to other less visible areas, such as designated funds or the church’s net asset account (retained earnings). The budget report is unaffected making it appear that the church “made budget”. Too much of this type of activity results in meaningless financial statements.
The church budget also has a spiritual role in that a church budget is simply the congregation’s vision for the coming year, stated in dollars.
KEY: This is particularly important in the establishment of your chart of accounts. A church’s chart of accounts should reflect its ministry. What your church management software representative suggests is just that; a suggestion. The same goes for your CPA
The AICPA CPA Letter Daily reported that companies that receive payments from credit cards or third-party settlement agencies may have to keep an eye out for 1099-K forms this year. These forms will be sent to businesses that receive more than $20,000 in gross payments from at least 200 transactions annually. Companies that receive both a 1099-K and a 1099-MISC should make sure their income wasn’t reported twice.
That’s great advice, but how does that apply to churches? Under this new reporting under the tax code, it is likely that churches who receive donations via credit card will receive a 1099-K from their merchant. However, as a tax-exempt organization (automatic for religious institutions), there is no further reporting requirement for churches. Nonprofits who file a 990 and taxable entities will report the information from 1099-K on their respective tax return, but this new regulation doesn’t change the fact that churches are exempt from filing a 990.
Thankfully, this new requirement will have very little impact on churches. But the tax laws change frequently, so it pays to stay informed. Subscribe to our updates by entering your email address in the box to the left so you don’t miss a thing!
Have other church tax questions? Add your comment below.
-Bryan Baughman, CPA, Church and Ministry Principal at PSK, LLP
That’s right! Even though churches normally do not have to file a tax return (most nonprofits have to file an informational return annually – IRS form 990), there is certain information that you must collect and provide to the IRS. And I’m not talking about payroll tax information – 941 and W-2 forms.
If you pay at least $600 in a calendar year for the services of non-employees (and they are not corporations), you must get them to complete form W-9 (provides tax reporting information to you) and you must issue them an IRS form 1099-MISC.
And if the church operates a preschool or private school that is not separately incorporated, you must file IRS form 5578. This is a statement about racial non-discrimination.
And if your church has “unrelated business income” of over $1,000 before deducting related expenses, you must file and IRS form 990-T. Again, I’m not talking about net income of over $1,000; I’m talking about gross receipts of that amount. And you could possibly have to pay income tax! But that’s the subject of a whole new blog entry!
For more information, go to the IRS website – www.irs.gov. Or even better, contact us at www.pskcpa.com.
–Dan Williams, CPA, Church and Ministry partner at PSK LLP.
I have a friend who has reminded me to be thankful for annoying things such as the red light I am stopped at, because I am privileged enough to live in a country that has roads, and orderly ones at that. This same attitude can be applied to taxes—thankfulness for them and for the ability to pay them.
I wanted to start with this thought, because none of us like taxes. But we can be thankful for them, and also take care to report them properly. As additional incentive for excellence in this area, did you know that if payroll taxes are not withheld and paid to the IRS, the Church’s Board of Directors and employees may be personally liable? Some thoughts on ensuring your Church is addressing taxes appropriately:
Who performs the Church’s payroll? Even If the Church is fortunate enough to use an outside payroll service provider, it is still important that the Business Administrator ensure that the following are occurring:
- For all non-minister employees, the Church correctly withheld and paid the employees’ share of FICA taxes.
- IRS form 941 was filed for each quarter of the calendar year.
- The totals from the four quarterly 941 forms agreed with the totals on IRS form W-3, which is prepared at year end and filed with the IRS along with employee W-2s by February 28 each year.
- Timely deposits of payroll taxes are made to the IRS. Required deposits vary. Generally, deposits may be made quarterly if total quarterly payroll taxes are $2,500 or less. Otherwise, deposits must be made monthly, or even more frequently for very large organizations.
- W-2 forms are provided to all employees (including ministers) by January 31.
How about your Church? Do you know for certain that payroll taxes are calculated, withheld, and remitted to the IRS correctly and in a timely manner?
–Justin Baldwin, CPA is a Senior Auditor specializing in church accounting with PSK LLP.
Both, a statement and a question!
Knowing what the organization owes as well as having confidence you have a complete and accurate picture really takes little to no effort. Start with a review of the debt amortization schedule. This schedule should require all note obligations and commitments including mortgage, loans, and leases.
Review the schedule on a routine basis, maybe monthly, and verify all obligations are reflected accurately on the balance sheet. For added assurance, periodically request written confirmation of the balance owed, directly from the lender. This should correspond to the amortization schedule. One added measure is a review of the general ledger for regular payments for the items listed on, or excluded from, the debt schedule.
As busy as your organization is, it is easy to miss something when trying to put it all together at the end of the year; but it is also easy to ensure all debt and obligations are accounted for with these basic internal audit steps.
Please share your insight. How involved or simple is your debt schedule? What do you feel needs to be included to be complete?
— Lisa Chapman is an auditor specializing in church accounting at PSK LLP.
Your financial statements are a key to making decisions for your Church. Let me rephrase that…ACCURATE financial statements are a key to making GOOD decisions for your Church!
I can’t stress enough just how true this statement is. Whether your Church is deciding to build a new campus, expand or remodel the existing campus, or even whether or not to purchase a new van for the youth trips, it is absolutely crucial that the Church is basing these decisions on accurate financial data.
A set of month end financial statements should be prepared on a timely (within 30 days) basis and submitted to the Church’s governing council. This “set” of financial statements should include at least a statement of financial position and statement of activities (more commonly known in the commercial industries as the balance sheet and income statement). The financial statements should include all funds: unrestricted, temporarily restricted, and permanently restricted.
Additionally, these financial statements should be reconciled with the amounts reflected in the accounting systems general ledger. For instance, if you pull an accounts payable aging report from your accounting system, does that total equal the amount you have recorded in accounts payable on your statement of financial position? It is very important that the Church’s sub-ledgers agree to the general ledger and financial statements. Two common fraud symptoms are a ledger that does not balance and that master account balances do no equal the sum of the individual customer or vendor balances.
How often is your Church preparing financial statements? What are some typical questions being asked by your Governing Council when reviewing these reports?
-Tia Fisher is a Senior Auditor at PSK LLP, specializing in church accounting.
Getting Value out of Your Church’s Financial Data
One of my wife’s favorite television shows is “The Antique Road Show”. Each week, people bring all kinds of antiques and assorted junk to an exhibit hall where experts tell them what they have and more importantly what it is worth. I have to admit that the show has a certain appeal to me as well. I particularly enjoy the scenes where people bring in some object they thought was at best sentimental junk only to find out they possessed an item with immense value.
For instance, one man had an old sampler in what he thought was a very nice frame. He had decided to throw the old sampler away because he needed the frame for another picture. On a whim, he took “the frame” to the Road Show only to learn that he had an early 19th century sampler worth more than $50,000!
When it comes to financial reporting and analysis many churches resemble this lucky man. They sit on a wealth of financial information never realizing its tremendous value because most churches focus all their energy answering three questions: “How much money did we bring in?” “How much did we spend?” and “How much is left?”
While the answers to these questions are indeed important, they are concerned with where the church has been. But, by digging deeper into the financial and statistical information it already possesses, a church can not only know where it has been, but also spot trends and determine where it is going.
One way of digging deeper is to combine financial data with other information. Most churches, particularly the larger ones, have sophisticated church management software that captures significant non-financial information such as names, addresses, ages, zip codes, and contribution history to name a few. Combining accounting information with this information greatly enhances a church’s planning abilities.
To illustrate let’s focus on the revenues of a church. The process is begun by adding one question to the ones mentioned above. In addition to asking how much money the church has brought in, we also need to ask, “Who gave the money?”
In the next series of posts I will share several ways churches can dig deeper in order to answer this question.
Verne Hargrave is the Church and Ministry partner at PSK LLP and author of the book, Weeds in the Garden.
(About Church Business)
It is extremely difficult but I try not to bring my work home with me. However, my thoughts often drift to finding ways to help churches while not in the workplace. For example, occasionally during my personal Bible study time I will see examples of good, as well as bad, financial behavior exhibited in the pages of Scripture. The story of King Joash in 2 Kings 12:1-16 and 2 Chronicles 24:1-24 is one example. On one occasion, while reading these passages I saw ten principles or maybe I should call them “best practices” of church financial integrity.
First, however, I wish to beg forgiveness before I begin. I must inform you that I am an accountant, not a Bible scholar. In what follows I am not attempting to interpret the Scriptures. I will leave that to much more qualified people. I am simply sharing some basic principles of church and pastoral financial accountability that came to mind as I read from God’s Word.
These thoughts were included in Practical Aspects of Pastoral Theology published by Tyndale Seminary Press. You can find the book at http://www.tyndale.edu/ or at http://www.amazon.com/Practical-Aspects-Pastoral-Theology-Christopher/dp/0981479154/ref=sr_1_10?ie=UTF8&qid=1286287914&sr=8-10
Verne Hargrave is the Church and Ministry partner at PSK LLP and author of the book, Weeds in the Garden.
