Health Care Reform Legislation Requires that W-2s Show Value of Health Coverage

Thanks to the health care reform legislation, employers are required to report the value of the health insurance coverage they provide on each employee’s annual Form W-2 beginning in tax year 2011.

This reporting is for informational purposes only, to show employees the value of their health care benefits so they can be more informed consumers, according to the IRS.

There has been considerable confusion generated concerning the reporting of the value of health insurance coverage—with rumors spread that the amount is taxable for income tax purposes. To be clear, the amount reported does not affect tax liability, as the value of the employer contribution to health coverage continues to be excludible from an employee's income and it is not taxable. For more information: http://www.irs.gov/newsroom/article/0,,id=220809,00.html?portlet=6

It might appear that this additional reporting requirement does not impact nonprofits until January 2012 when the 2011 Form W-2s must be filed. However, departing workers can ask for a W-2 within 30 days of the final paycheck or the date the request is made, whichever is later. Even though few people do this, charities will need to be ready in early 2011. The calculation of the health plan’s value is the same as the value used to figure the allowable premium for COBRA coverage.

Preparedness to comply with these new government regulations is the key.

The Hidden Costs to Charities Just Keep Rising

A recent study commissioned by the National Business Travel Association says that travelers pay up to $101 in sales, hotel, rental car and other extra taxes aimed at them on an average three-day domestic trip.

Since many nonprofits have significant travel budgets, taxes that target travelers are understandably concerning.

The study found that a typical business traveler pays $101.27 in taxes on average for hotel, rental car and meals during a three-day, two-night stay in Chicago—more than in any other city. And travelers pay more than $85 in similar taxes during the same length of stay in Seattle, Minneapolis, New York and Boston.

As states and local municipalities continue to struggle to balance budgets, taxes on travelers will undoubtedly continue to rise—impacting nonprofit and other travelers.

Preparing for the Government’s Impact on Flexible Spending Accounts

Many churches and charities provide flexible spending accounts (FSAs). Using an FSA is often good stewardship. The new health care reform law requires certain changes to FSAs:

• In 2011, employees will no longer be able to receive pre-tax reimbursements from their FSA for non-prescribed over-the-counter medications. Thus, the cost of over-the-counter medicine (other than insulin or doctor prescribed medicine) cannot be reimbursed on a tax-free basis through an FSA. FSA plans should be modified to exclude these reimbursements.
  
• In 2013, employee contributions to FSAs will be capped at $2,500 annually, with the cap adjusted annually to the Consumer Price Index. FSA plans should be modified in accordance with the new cap, plus annual adjustments.

Planning opportunity: Most charities do not have a properly established plan to reimburse out-of-pocket medical expenses. Even though FSAs will be capped at $2,500 annually in 2013, the benefit of offering an FSA to all staff members on a salary reduction basis is significant. For example, a staff member with marginal (the tax rate on his or her last dollars of income) state and federal tax rates, including social security, of 40% could save $1,000 if they have $2,500 of out-of-pocket medical expenses that are covered by an FSA.

Like someone once said: “You save $1,000 here and another $1,000 there and after a while you are talking about some real money.”

The Government’s Vanishing Charitable Deduction?

Several states are considering capping charitable deductions—New York is the latest. The Administration proposed capping charitable deductions (and other itemized deductions) to fund health care proposals and has stated an intention to include such a proposal in the 2011 budget.

A bipartisan proposal introduced by Senators Wyden (D-OR) and Gregg (R-NH) bears watching. Under their tax reform bill (S. 3018), standard deductions would soar: $30,000 for those married filing jointly, $15,000 for singles and $22,500 for heads of households. Such a change would effectively eliminate the charitable deduction (and other itemized deductions) for most taxpayers other than high-income individuals.

And, the chorus of those opposed to the charitable deductions is also rising. Just one example is found in Edward Kleinbard’s blog.

What does the future hold for the charitable deduction? While it is unclear, it appears there will be increasing pressure to reduce the value of the deduction or eliminate it all together.

Churches and other Christ-centered nonprofits have always relied on committed givers. The commitment level may be raised in the future—giving without respect to a tax deduction.

In searching the Scriptures, I find no requirement to obtain a tax deduction before we give. No, giving is a spiritual issue of the heart. It is an act of obedient worship.

Fraud … and Lessons in the Lack of Accountability

The August 16, 2010 edition of The Wall Street Journal featured two poignant articles on fraud. While the examples in the articles are from the for-profit world, this is a teachable moment on accountability for the Christian nonprofit arena as well.

There were other issues than money involved in the departure of Mark Hurd as Hewlett-Packard’s CEO. But apparently, it was something as simple as inaccurate expense reporting that tripped him up.

In another story, the founder of Courette Building Systems, Salem, VA, tells how he placed one employee in charge of both receipts and disbursements. Among other fraudulent acts, the employee pocketed over $300,000 he was supposed to send to the IRS to cover payroll taxes.

At Interactive Solutions, Memphis, TN, the founder and CEO took some occasional days off while mourning the death of his brother. His bookkeeper had been referred by an attorney and someone that had sung with her in the church choir. After reading an article about fraud, something clicked with the CEO and he said to himself, “That could happen to me.” He began looking and quickly discovered thefts in the form of bogus bonuses and commissions by the dozens.

In both instances, the guilty parties are serving time in prison but the losses were mostly unrecovered and the fraud nearly devastated the two organizations.

According to the Association of Certified Fraud Examiners, 31 percent of all business frauds nationally were within companies of fewer than 100 employees. Only 21 percent were committed in companies with over 10,000 employees. So most fraud happens in small organizations. It can happen to you!

While it is not practical to illuminate all fraud, it is possible to minimize the risk of fraud. See http://www.ecfa.org/Fraud.aspx.

The challenge is to respond but not over-react when fraud is discovered. Determine where your organization is most at risk and investigate those risks. Modify procedures to reduce risks. But the mission of the nonprofit must go on—and your nonprofit organization can be stronger because of the painful fraud that you experienced.

Your mission is still the main thing. Don’t take your eye off the ball.

Preparing for the Impact of the Government’s Health Care Reform

No matter what you think about health care reform, one expectation is clear: health insurance costs are going up soon. Based on a recent Mercer study, employers expect health insurance costs to jump as early as the 2011 plan year. [1]

The Mercer study also revealed health care reform provisions that concern employers the most. Here are a couple of the areas of concern:

• Dependent care coverage. Beginning September 23, 2010, all organizations must extend dependent coverage to all dependent children—even married ones—up to, and including, age 26. Most employers will need to change their dependent eligibility rules to comply with the reform law.

• Providing coverage to more part-time workers. The reform law will require employers to offer “affordable” health care coverage to all employees who average 30 hours per week or more in a month—starting in 2014. This provision will especially impact organizations that heavily rely on part-time labor at the 30 or more hours a week level.

Making appropriate plans to meet the health care reform laws are very important (adherence to laws is required by ECFA’s Standard 4) but it will not be easy. The temptation will be to simply offset increased health insurance by decreasing benefits to staff. But should staff shoulder the burden of increased health care cost? The issue is more complex.

Most surveys of workers show that benefits are second in importance only to job security. The importance of compensation usually ranks last or nearly so.

So, if benefits are so important, why do employers considering cutting benefits as one of the first cost-saving options? As long as employer-provided health insurance is tax-free, why not maximize the tax-free benefit and make other adjustments to balance the budget!

Consider offsetting the coming increases in health care costs with employee engagement, motivation and efficiency. Even after making recession-related adjustments, most organizations have many ways to increase efficiencies and reduce costs by focusing on issues that are really important.

[1] http://www.mercer.com/summary.htm?idContent=1380755

Billionaires Pledge to Give—But to Whom?

Bill Gates and Warren Buffet are lining up the billionaires to give to charity. The gifts will be significant—and undoubtedly will help humankind.

But which charities will receive these new-found billions of gifts? Christ-centered charities? Most of the gifts will go to education, the arts, and so on. While some of the new giving will find its way to the Christ-centered word, it will remain the responsibility of believers to give generously to causes to fulfill the Great Commission.

In Bob Buford’s last newsletter, he shares good news about giving. His encouragement is “mirrored by Pamela Hawley, a bright young person who is Founder and CEO of Universal Giving, who said, ‘I can see the fear if I want to. And yet, I am resolutely encouraged.

'Giving is being pushed down. It is no longer about the 50-year old who has it made and wants to give back. Giving is taking place at the age of 10. College students are using their spring vacation to build homes. Media stations are using their news stations to get people involved.

'Good people, good things, good partnerships are transpiring. Find them, see them, stoke them, cherish them. And goodness will begin to explode across the world in the most wonderful way. It already is.’”

Credibility

It generally takes years for a church or a nonprofit organization to gain significant credibility.

(A linchpin in obtaining credibility is accountability—that is where ECFA comes in.)

And yet credibility can be lost or seriously impaired in a very short period of time.

Credibility should be carefully guarded. But even when we are protecting our credibility, it is possible for others to inappropriately borrow it.

In recent weeks, ECFA’s credibility has been borrowed by an individual who alleges to have residential real estate for rent and offers it on a popular website. The imposter purports to be a volunteer for ECFA in Africa.

The problem? This person has no real estate to rent. And, ECFA does not have any volunteers in Africa.

Sadly, we have received reports that individuals have actually transferred funds to this scam artist.

While we have reported this matter to law enforcement authorities, there is little ECFA can do to prevent people from improperly borrowing our credibility.

What is the lesson? Credibility…challenging to obtain…important to maintain…easily lost…easily borrowed.

Always remember credibility’s place in the chain: accountability leads to greater credibility….which leads to more resources for ministry….which enhances our ultimate goal of fulfilling the Great Commission.

White-Water

Kayaks are designed for various purposes—some for light touring or day-tripping on lakes and gentle rivers, sometimes known as flat-water. They are for folks who want to take in beautiful scenery.

Other kinds of kayaks are designed for white-water—those fast moving streams littered with rocks and whirlpools and ledges. White-water kayakers don’t get to chat or rhapsodize about the scenery or shoot pictures of wildlife. They’re too busy figuring out how to remain right side up.

Some churches and other Christ-centered nonprofits are designed for flat-water. Yes, they are open to certain changes and innovations, but these are done at a pace where adjustments may reasonably be made.

In a flat-water environment, revenue and expenses moderately increase each year. Givers consistently and faithfully provide support.

Today, churches and other Christ-centered organizations are in a white-water world. The U.S. recession continues to linger. The U.S. federal government debt load of more than $13 trillion is staggering (http://www.usdebtclock.org/). Our federal government is spending at the rate of $3.6 trillion per year when the revenue is only $2.2 trillion per year.

California, New York and other states show similar signs of debt overload that recently took Greece to the brink—budgets that will not balance and accounting that masks debt.

Harvard professor and financial historian, Niall Ferguson, recently stated that the U.S. is “on the edge of chaos” suggesting that there is an increasing prospect of the American “empire” to collapse suddenly due to the country’s rising debt.

The co-chairmen of the Administration’s debt and deficit commission offered an ominous assessment of the nation’s fiscal future, calling current budgetary trends a cancer “that will destroy the country from within” unless checked by tough action in Washington.

There are increasing challenges to religious freedom: a court case that challenges the housing allowance for many ministers is moving forward and the failure to balance budgets will significantly impact nonprofits and givers who support them in the next few years.

Yes, white-water times are here to stay. Leadership designed for flat water no longer works.

What should we do in white-water times? It’s time to think like Jesus (I borrow George Barna’s wonderful book title). What would Jesus do if He were in our shoes right now? Surely he would tell us to:

• Be prepared. Anticipate white-water times; be prepared for events to turn against you.
• Avoid panic. Continue to do what is right, wise, and consistent with biblical principles.
• Encourage one another. Reaffirm truths. Thank God for His promises.
• Anticipate His coming. Look forward to the day history will be cleansed by the return of the King of Kings.
• Be not afraid. Live not in fear but in confidence in a sovereign God.
• Be absolutely integral and noble in carrying out your call.

And, above all, I believe Jesus would tell us to be steadfast in our focus on the Great Commission. As my friend, Dr. Walt Russell, says: “As in every era of history, we as God’s people have been given a very specific historical task to accomplish. Our historical task is appropriate for the ‘last days’ and the culmination of the ‘fullness of time’ under Jesus the Messiah. Commissioned by King Jesus and implemented by the Apostles in the Book of Acts, our present priority of the Church’s mission is the rapid advancement of the worldwide harvest and the ongoing preservation and ripening of its fruit through the planting of vibrant local churches among every people group.”

Inspired by an article of the same title written by Gordon MacDonald.

Understanding the Government’s Crackdown on Form 990-N Filers

Much has been written about the government’s crackdown on small charities. Websites are replete with information about the Form 990-N filing requirement for nonprofits with gross receipts of $25,000 or less.

Sadly, much of the reporting has been less than accurate—and that is being very polite. Here are a few examples that are reflected on the Internet today by four different highly respected organizations:

• “Most faith-based organizations are not required to file Form 990.” Highly confusing. This statement would be true only if churches are included in the definition of “faith-based organizations.” When the term “faith-based organizations” is used, the reference is usually to parachurch organizations exclusive of churches.
• “What organizations are exempt from filing Form 990? Faith-based organizations.” False—same reason as above.
• “Certain organizations are not required to file Form 990. This includes religious organizations.” False. There is no general exemption from filing Form 990 for religious organizations.
  
• “Charitable organizations other than churches that do not file a tax return with the IRS for three consecutive years now automatically lose their exempt status.” Close, but not quite. This is almost true but not quite. There are charitable other than churches that are not subject to this requirement, i.e, religious orders and integrated auxiliaries of churches.
  

So, it is no wonder there is confusion about how to comply with the law concerning Form 990-N. ECFA requires its members to comply with the law (Standard 4), but since ECFA members must annually have $$50,000 or more of gross receipts, the Form 990-N does not directly apply to ECFA members. However, some of our members provide assistance to other ministries which have $25,000 or less of annual gross receipts. Thus, this is an important issue for those member organizations.

Here are the short-strokes on this issue:

• Certain small (gross receipts of $25,000 or less during tax years beginning in 2007, 2008, and 2009) tax-exempt organizations that fail to satisfy annual filing requirements for three consecutive years are at risk of losing their tax-exempt status if they have not filed for 2007, 2008 and 2009.
  
• The “drop-dead” deadline initially set for May 17, 2010 has been delayed until October 15, 2010
  
• The latest announcement from the IRS is reflected on their website: http://www.irs.gov/charities/article/0,,id=225705,00.html
• Certain religious organizations are exempt from filing Forms 990, 990-EZ and 990-N. As described in the instructions for Form 990 (http://www.irs.gov/pub/irs-pdf/i990.pdf), those exempted from the filing requirement are:
  
• A church, an interchurch organization of local units of a church, a convention or association of churches, or an integrated auxiliary of a church as described in Regulations section 1.6033-2(h) (such as a men’s or women’s organization, religious school, mission society, or youth group).
  
• A church-affiliated organization that is exclusively engaged in managing funds or maintaining retirement programs and is described in Rev. Proc. 96-10, 1996-1 C.B. 577.
  
• A school below college level affiliated with a church or operated by a religious order described in Regulations section 1.6033-2(g)(1)(vii).
  
• A mission society sponsored by, or affiliated with, one or more churches or church denominations, if more than half of the society’s activities are conducted in, or directed at, persons in foreign countries.
  
• An exclusively religious activity of any religious order described in Rev. Proc. 91-20, 1991-1 C.B. 524.
• An entity under a group exemption. If you represent such an entity, it is wise to confirm your organization is listed on the annual Form 990 or other filing made by the organization representing the group. Otherwise, the filing of the Form 990-N may be appropriate.
  

Final thoughts. Some organizations that believe they are exempt from the Form 990-N filing requirement are really subject to the filing of Form 990-N. Conversely, some who think they are subject to the filing are really exempt. How do you know whether your organization is subject to the filing or exempt from it? Consult your tax advisor.

A Postcard from the Future

The signs of the times are clear and potentially disturbing. In this era of big government, the benefits and protections long afforded churches and other nonprofit ministries are increasingly at risk.

While the financial pressures of state and federal governments are the key drivers of the potential incursions on nonprofits, changing attitudes on Capitol Hill towards charities are also a factor.

New proposals impacting nonprofits by state governments are reported in the media on almost a weekly basis. New fees and losses of sales or property tax exemptions are all possibilities.

Are you familiar with the acronym PILOT with respect to property taxes? PILOT means payments in lieu of taxes and it is based on the “soft” contacts some larger charities are receiving. With states beginning to ask for the voluntary payment of property taxes, it may only be a short step from voluntary to required payments.

At the federal level, there are increasing rumblings about potential changes impacting charities and givers. The notion of capping the charitable deduction for high income givers was floated last year. The proposal was very controversial and it was omitted from the health care bill. However, the Administra­tion included the charitable contribution deduction cap in the budget proposals for 2011, so the concept is not dead. While the impact of a contribution is an imponderable, it certainly would not be an incentive for giving.

On the Hill, there are more frequent references to the cost to the federal Treasury of charitable deductions and tax-exempt status churches and other nonprofits. It is estimated that the charitable deduction costs the Treasury $46 billion annually. Allowing churches and other charities to have tax-exempt status costs the Treasury another $50 billion per year. With these estimates come the not-too-veiled-threats of restoring some of these dollars to the Treasury to fund programs.

In response to these concerns, ECFA is stepping up to the Capitol Hill challenge. We are now devoting more energy to developing key relationships on and around the Hill than at any time in ECFA’s 30-plus years.

In its spring meeting, the ECFA board approved six public policy positions representing fundamental areas of significant interest to our members (see below).

This is an important time for ECFA members to pull together, coalescing around principles of accountability and standing firm behind public policies that are fundamental to our existence. Your organization can do this through your strong support of ECFA, encouraging other Christ-centered ministries to join ECFA, letting your Congressional representatives know about the good work you are doing, and praying for our leaders at the federal and state levels of government.

IRS Reports on the Nonprofit Colleges and Universities Compliance Project

The IRS recently released an interim report relating to responses to compliance questionnaires sent to 400 public and private colleges and universities. Colleges and universities make up one of the largest nonprofit segments in terms of revenue and assets.

After combing though the report, I noted several items of particular interest:

1. Endowment funds. The target spending rate for endowment funds in the study range from 4.7% to 5.0%. Charles Grassley, (R-IA) has pushed hard for a minimum 5% endowment spending rate. There are some that might suggest the 5% goal effectively becomes a ceiling on the endowment spending rate.
   
   
   
2. Highest paid employees. In the case of large organizations, the highest paid employee was often a sports coach—(43% of organizations).
   
   
   
3. Use of the rebuttal presumption: More than half of the organizations in each size category reported using a rebuttal presumption process to establish key compensation. On all size levels, the use of comparability data to establish compensation was present less frequently that the other rebuttal presumption factors (adequate documentation and approval by an independent governing body). One would have expected the percentage of organizations using the rebuttal presumption to be much higher.
   
   
   
4. Conflict of interest policies. While 80% of organizations in each size category are reporting having conflict of interest policies covering members of the ruling body and top management officials, it is surprising that this percentage is not 100%.
   
   
   
5. Unrelated business income. One key issue the IRS has identified through the survey is that many public and private institutions are involved in business activities that they are not reporting as taxable income to the federal government.
   
   Most of the institutions surveyed also are not seeking out expert advice to determine whether to report those activities, the agency found. More of the institutions surveyed also are not seeking out expert advice to determine whether to report those activities, the agency found. More than 60% of all the colleges responding to the survey reported that they did not rely on independent accountants or the college’s general counsel on such matters.
   
   
   
6. Disclosure of financial statements. Only 76% of small colleges and universities reported making their audited financial statements available to the public while 91% of medium-sized organizations and nearly 97% of large colleges and universities reported doing so. ECFA members are required to make their financial statements public. It is surprising that 100% of the organizations studied are not committed to this important step of transparency.
   
   
   
7. Compensation policy. Only 34% of the smaller organizations had a formal written compensation policy and even the large organizations only averaged 63% with a formal written compensation policy. These numbers are surprisingly low.

The IRS said it has already begun audits of more than 30 institutions based on their responses to the survey. Thirteen institutions that did not respond to the IRS questionnaire are also being examined, as well as an undisclosed number of colleges that did answer all of the questions, the agency stated. The IRS has not identified the institutions that were sent the questionnaire nor the colleges that are getting audited.

It will be interesting to see if this compliance project becomes a model for questionnaires and compliance in other niches in the nonprofit arena.

Assuring Trust

In his Wall Street Journal column sum­marizing the past 10 years, Thomas Frank titled his editorial “A Low, Dis­honest Decade.” He goes on to say “Ensuring that the public failed to get it was the common theme of at least three of the decade’s signature foul-ups...as the press and politicians were asleep at the switch.” Contrasting this attitude of keeping the public uninformed, ECFA starts its fourth decade of assuring the public’s trust by encouraging Christ-centered churches and parachurch ministries to function at the highest levels of integrity and accountability. Driven by a steady flow of reports of possible wrong­doing, ministries are increasingly under scrutiny by the media and the donor public. It’s an issue of trust. Congress has ramped up its attention on churches and parachurch ministries in the last few years—even implying that some ministries cannot be trusted. While we have enjoyed a brief respite from this attention during the health care reform debate, it is now back to business as usual on Capitol Hill. The recession has impacted most ministries—and the depth and length of the financial trough is still an unknown. When the flow of funds tightens, there is often a temptation to use project-restricted funds for operational purposes or to be less than fully forthright in stewardship appeals—these are paths that will not evoke trust. This all adds up to the ingredients for a perfect storm—high scrutiny by the media and public, additional concerns by Congress, and operating funds in a shorter supply than we have seen in recent years. And the issues generally relate to finances, fund­raising/stewardship, and governance; all three are found in the core of ECFA’s standards. It is a time to be trustworthy in all these areas. What an opportunity for ministries seeking to fulfill the Great Com­mission to be models of integrity and accountability during the swirling turbulence! What a time for givers to open the storehouse doors as Joseph did in times of old and support ministries that take the high ground! What a time to be trustworthy! Accountability to God, to a ministry’s governing body, to its financial supporters, and to the government are all bedrock components of trustworthiness. A ministry may be functioning at the highest level of integrity “in the eyes of the Lord.” But how does a ministry demonstrate it is doing right “in the eyes of men”? How will it demonstrate trustworthiness? This is difficult without independent oversight by an organization like ECFA. Accountability to ECFA’s standards and the commitment of a ministry to annual and special reviews is an important element of building trust in those who support ministries. With hundreds of thousands of churches and tens of thousands of parachurch ministries—and many more being approved each year by the IRS—is it any wonder that many donors are concerned about which ministries they can trust? It is not surprising that nearly two million visits are made to ECFA’s website annually—primarily to determine whether a certain ministry is an ECFA member or not; 35,000 clicks were made by Web users in January 2010 looking for a project in ServantMatch™. Givers want to support ministries they can trust. It should not be surprising that Christ-centered churches and parachurch ministries are fulfilling ECFA’s accreditation requirements at a record pace in a desire to earn the public’s trust. ECFA welcomed 100 or more new organizations into membership in 2008 and again in 2009—a pace unparalleled in the last 20 years! John Wesley said: “Our respon­sibility is to give the world the right impression of God.” ECFA plays a critical role in this process for ministries.

A Time to Focus on Fulfilling Giver-Imposed Restrictions

One of the impacts of the disastrous Haiti earthquake will be a heightened focus on how ministries raise and use gifts given for Haiti-related programs. There will be stories about charities that operated outright scams. But the focus will also be on legitimate ministries and other charities. If you doubt this, simply think back to the events after 9/11 and the loss of credibility for charities that did not spend funds as promised. The Haiti earthquake highlights the importance of truthfulness in fundraising—a key ECFA standard. There are a wide variety of programs being delivered: disaster relief, development, church planting, child sponsorship, volunteer medical teams and much more. While some ministries are well-equipped to conduct church planting and child sponsorship, it could be disingenuous to represent that they provide disaster relief or post-disaster development process of rebuilding infrastructure and livelihoods. This is a time for organizations ministering in Haiti to perform a checkup:

1. Do fundraising appeals (printed, web, and other media) clearly and accurately communicate the ministry your organization is prepared to perform?
2. Will your ministry expend the gifts within a reasonable time period?
3. If there is a possibility of raising more gifts than needed to carry out the project communicated to givers, did the fundraising appeals clearly state how any excess funds will be used?
4. Does your organization raise funds for foreign charities providing services in Haiti? If so, you may be crossing the line into conduit transactions that may not result in a charitable gift for the giver.
5. Does your organization raise funds for Haiti projects and make gifts or grants to foreign charities providing services in Haiti? If so, are policies and procedures in place to ensure proper oversight of the use of the funds?

So if your ministry is accepting funds for projects in Haiti, perform your due diligence now on what is being promised to givers, how you will track the gifts, how you will spend the funds, and how you will monitor the outcomes of the programs. It will be time well-spent.

Tax and Finance Opportunities for Clergy and Congregation in 2010

The new year 2010 brings new opportunities for congregations and clergy with respect to tax and finance issues. Here are four reminders to help you get the new year off to a good start.

• Business mileage. The IRS has provided a new maximum business mileage rate for 2010 of 50 cents per mile. The new rate is down from the 55 cents per mile maximum for 2009. The new mileage rate has the following implications for congregations and clergy:

1. If the congregation has been reimbursing business miles at a rate less than 50 cents per mile, it may be an appropriate time to consider increasing the reimbursement to the new maximum rate. Reimbursing clergy (and other staff) at a rate less than the maximum rate is simply poor stewardship. The difference between the maximum IRS mileage rate and a lower rate of reimbursement has little tax value to the staff member. It is so much better to prospectively establish compensation at a level which allows for a reimbursement of business mileage at the maximum rate.
2. If the congregation has been reimbursing business miles at a rate more than 50 cents per mile, a reduction in the reimbursement rate to the new maximum is generally appropriate. If a congregation continues to use a reimbursement rate higher than 50 cents per mile in 2010, the amount reimbursed over 50 cents per mile is additional taxable compensation to the staff member.

• Clergy housing allowance. The first of every year is a good time to review the amount of the housing allowance designation for each clergy employed by the congregation. Retroactive housing allowance designations are invalid, so if a housing allowance designation needs to be increased, the earlier the action is taken in a year, the better for the clergy. A housing allowance designation is appropriate for clergy who own or rent their own home or who live in a parsonage and pay some of their housing expenses.
• Reimbursement of business expenses. The first of the year is also an excellent time to review the accountable expense reimbursement practices of the congregation. A congregation that only reimburses a portion of clergy business expenses is generally penalizing the clergy from a financial standpoint. What is the value of business expenses not reimbursed by the congregation? They only have minimal value because:
1. The IRS is increasingly firm about disallowing the portion of unreimbursed expenses that relates to a housing allowance exemption. Example: A clergy receives $50,000 cash compensation, of which $25,000 is designated as a housing allowance. After applying the housing allowance limitations, the clergy excludes $25,000 for federal income tax purposes. The clergy has $5,000 of congregation-related expenses that were not reimbursed. The IRS takes the position that since 50% of the congregation-related compensation is tax-free under the housing allowance rules, only 50% of the unreimbursed expenses are deductible (50% x $5,000 =$2,500).
2. Clergy that do not itemize deductions on Schedule A (this includes nearly all clergy who live in congregation-provided housing) receive absolutely no income tax benefit from unreimbursed business expenses. Even clergy who itemize deductions, are limited to claiming unreimbursed expenses that exceed 2% of adjusted gross income. And, then the tax savings is limited to the marginal federal income tax rate.
• Income tax withholding. The first of the year is also a good time to determine whether the congregation will withhold federal (and, perhaps state) income taxes for 2010 on a voluntary basis. (If this withholding was in placed for 2009, then, it may only be a matter of adjusting the voluntary withholding amount for 2010.) Income tax withholding is not required by a congregation for clergy—it is a voluntary issue. But, congregations who offer this option are often doing clergy a good favor by providing this practical way to pay their taxes as they go. The amount of federal income taxes withheld may be set at an amount high enough to cover self-employment social security taxes. The withholding is FICA; it must be withheld as federal income taxes even though it funds the self-employment social security tax obligation.