Not understanding intellectual property law can be a VERY EXPENSIVE TRAP! David Middlebrook defines intellectual property as “ownership of nonphysical property rights in creative thought or works that have basically been recorded or reduced to written form.” (Nonprofit Law for Religious Organizations; John Wiley & Sons, © 2008)
There are two types of intellectual property that a church needs to be aware of:
First, every church must be familiar with the intellectual property rights of creations by OTHERS. Examples include sheet music, video clips, song lyrics displayed on the screen during worship, and software licenses. The individuals and companies that created these things DESERVE TO BE PAID for their creations! Not adhering to copyright/trademark laws can result in some extreme financial penalties.
Second, every church must be aware of the rules regarding their OWN creations. This includes creations of church employees (including the senior pastor…) who create work in the course of their employment. Examples include music, videos/movies, books and software.
Not being attorneys we are reluctant to give much advice in this arena because intellectual property is more of a legal issue than tax and accounting.
Our advice is usually very short – “Seek legal counsel to help you determine your church’s compliance with these rather confusing laws.” (David Middlebrook’s Church Law Group would be a good place to get this help.)
Many churches pay little attention to the concept of “reasonable compensation”.
Nonprofit organizations, of which churches make up by far the largest percentage, must serve public interests not private. As a result, an individual should not receive assets from a nonprofit entity simply because they have a significant relationship with the charity. If this happens, the private inurement might have occurred. If the IRS finds that inurement has occurred, painful penalties, called “intermediate sanctions” may be assessed on the individual receiving the resources. Penalties may also be assessed on the organization’s board for allowing this to happen.
One often overlooked aspect of private inurement is the concept of compensation. Nonprofit organizations can only pay a reasonable compensation to its employees. Like beauty, reasonable can be in the eye of the beholder. So, what is reasonable compensation?
Fortunately, the IRS lays down some guidelines to help answer this question. If a church:
Requires an independent compensation committee to set salaries that,
Based its decisions on comparative data of other similar churches and,
Documents its decisions in writing,
a presumption of reasonableness is established.
Overlooked danger zone – The Pastor’s Discretionary Fund
Many churches, for privacy purposes, establish special funds in which the pastor has total control over to cover sensitive benevolence issues. While it is understandable why some churches take this course there is one point that must be made. If any of the funds can be, at the pastor’s sole discretion, be diverted to the pastor or his family, the entire amount could be considered income. If your church has such a fund it would be a good idea to review the terms the church has established (if any) to administer the account.
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.
In our litigious society, it seems like people file lawsuits for just about anything, but since when did copyrights and licenses become so sensitive? The old days are gone; the truth is, operating a Church becomes more and more complex every day. So what are a few things an administrator can do to protect their organization?
Worship Music, for example, is majority owned by record labels. The Christian artists usually make licensing deals with organizations like Christian Copyright Licensing International (CCLI.com), which in turn charges a yearly subscription fee based on the size of your congregation (starting for about $50 for a small congregation). Some worship pastor's prefer to write their own music, which is great because you don't have to buy a license for their works. However, then the question arises – who owns those songs he/she writes on the clock? An intellectual properties policy can help clear up any confusion between you are your creative team.
Does your Church show videos in youth group or as an illustration in a sermon? There are other groups for videos such as Christian Video Licensing International (CVLI.com) that sell affordable licenses to view certain protected materials within your organization.
Even looking at your copy machine, it's a best practice to have a notice posted by each machine warning against the duplication of protected materials. And finally, let's not forget about software. Make sure that when you are buying software that you are respecting the software licensing agreement and abide by the notice as to how many computers and users that each license allows.
Is your organization at risk? Need help navigating any of these areas? PSK can help!
–Daniel Lienemann, CPA is a Senior Auditor specializing in church accounting 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.
Does your church have 25 or fewer full time employees? If so, the government wants to give you some money. The recently passed health care bill included a tax credit for small businesses that provide health insurance for their employees. Although churches do not typically file income tax returns, they are still eligible for the tax credit.
You are correct, there is a catch! There are three primary factors that would qualify your church:
- The church must pay for a portion of its employees’ health insurance
- The church must have less than 25 full-time employees
- The average wage of a full-time church employee must be below $50,000
If your church meets the criteria above, the church could be reimbursed up to 25% of the health insurance costs that were paid by the church.
As of now, the credit is good for 2010 to 2013 and then the maximum rate increases to 35% (good news). This could be money in your church's pocket! Let PSK assist you in determining if your church qualifies for the health care tax credit.
Great news for the small nonprofits. The filing threshold has finally increased from $25,000 in gross receipts to $50,000 in gross receipts for tax years ending on or after December 31, 2010. This means if the nonprofit’s gross receipts are normally $50,000 or less you can file the simple 990-N e-postcard as opposed to the more detailed 990-EZ or 990 forms. To read more about how to determine if you gross receipts are considered $50,000 or less, check out the IRS's website.
It is simple to file an 990-N. Simply go to the IRS's website and follow the instructions. The process takes less than 15 minutes.
The increase in the filing threshold for 990-N is part of the 2006 Pension Protection Act of 2006 which mandated most tax exempt organizations file an annual return.
The Tax Relief, Unemployement Insurance Reauthorization & Job Creation Act that was signed into Law in December 2010 has made changes to the way you calculate your social security deductions on your employee paychecks for 2011.
Social Security tax rates will be reduced by two percentage points. The employee-portion of Social Security taxes will be reduced from the current 6.2% to a temporary rate of 4.2% for 2011 only. The employer-portion remains the same at 6.2%; and the Social Security wage base remains the same at $106,800 for 2011. Medicare tax rates are not changed: remaining at 1.45% each for employees and employers. Freelancers, farmers and other self-employed persons will see a corresponding reduction in their self-employment tax. The total 15.3% self-employment tax rate is temporarily reduced for 2011 to 13.3%. Self-employed persons will still be able to deduct the full amount of the employer's portion as an adjustment to income.
You have until January 31, 2011 to make sure you are calculating your employee deductions correctly and until March 31, 2011 to correct any payroll in January that might have been calculated using the old 6.2% deduction rate.
Please give us a call if you have any questions.
