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Economic Empowerment Through the ChurchA Blueprint for Progressive Community Development
By Gregory J. Reed
ZondervanCopyright © 1994 Zondervan
All right reserved.
To save America's soul, the ministry consciousness must be transformed to become the progressive Clergy ...
What follows is a list of the most commonly asked questions by those involved in the church relating to clergy and tax issues. We have written these questions and given the applicable general answers. Detailed answers to these questions can be found within the applicable sections of the book. These short answers are a guide to the general church-related tax questions that may be asked-but there is no substitute for professional assistance.
I. Church and Nonprofit Organization Start-up
Q: What defines a church for tax purposes?
A: The IRS does not have a specific definition of what is a church. Instead, it determines on a case-by-case basis whether a particular organization is a church.
Q: Why should a church incorporate?
A: Incorporation would help church members or volunteers avoid individual personal liability from any lawsuits or legal problems related to the church. Q: What documents are needed to begin an ecclesiastical nonprofit corporation?
A: Articles of Incorporation, Bylaws, and Corporate Minutes.
Q: Why should your organization have a federal Employer Identification Number (EIN)?
A: Having an EIN will help the pastor or members of the church avoid personal liability for taxes and it distinguishes the church entity from any individual member.
II. Contributions and Donations
Q: When are charitable contributions/donations deductible for tax purposes?
A: Contributions are deductible when made to a church organization that has been declared tax exempt by the IRS. Items donated cannot be used or sold in a manner contrary to the church's tax-exempt status.
Q: What organizations qualify as tax-deductible donees?
A: Organizations that have filed the appropriate tax-exempt application and have been approved by the IRS. These organizations cannot participate in political campaigns or discriminate against any individual.
Q: What contributions are not deductible?
A: Gifts made that are contingent upon some act or event which may occur, and the value of volunteer labor are not deductible.
Q: What is the IRS's position on churches in the home?
A: Churches in the home are allowable but problems may arise in determining housing and parsonage allowances.
Q: What forms of non-cash contributions qualify as tax-deductible contributions?
A: Clothing, land, stocks, and other tangible or intangible items qualify. Problems arise if the contribution is income producing. Donors, also, may not be able to deduct the full value of some donations (e.g., stock). You should consult a tax attorney to determine how much is deductible.
Q: How must contributions/donations to qualified organizations be given in order to be deemed tax-deductible?
A: The church should allow the donor to determine the value of the item. For (non-cash) property valued over $5,000, the church must complete Part I, Section B of the donor's Internal Revenue Service Form 8283 appraisal summary. In order to claim a deduction, the tax payer must submit verified receipts for the deduction to be allowed.
Q: What support should your organization maintain for contributions/donations received?
A: Volunteers or paid staff should be available to receive the items, disperse receipts, and maintain records of donor-determined value of the items.
III. 501 (c)(3) Tax-Exempt Status: Why Is It So Important?
Q: What are some of the benefits of IRS 501(c)(3) federal tax exemption?
A: A nonprofit church that qualifies for tax-exempt status is not liable for taxes to the federal government on income (if related to their tax-exempt purpose). Donations and contributions would be tax deductible to the person donating.
Q: Is a church required to obtain federal tax-exempt status to operate?
A: Some states require that a church obtain tax-exempt status to operate within their boundaries. It must be noted that a church is considered to be tax-exempt irrespective of filing a tax-exempt application 1023 with the federal government. States do not and cannot grant tax-exempt status.
Q: How does one apply for federal tax exemption?
A: First, obtain legal counsel. Second, with the aid of legal counsel, complete the following: Articles of Incorporation, Bylaws, Minutes, and Internal Revenue Service 1023 Application. Last, mail these forms to the appropriate agencies.
Q: What is the cost and how much time is needed to prepare the tax-exempt application?
A: The cost is moderate. A church saves time by completing the forms with an attorney. Filing without professional help will cause problems and delays in the application process.
Q: What is a Group Exemption?
A: Some organizations or churches can be tax-exempt by virtue of being affiliated with a church or being a member of an association of churches.
Q: What are the public disclosure requirements for tax-exempt organizations?
A: All tax-exempt applications mailed after July 15, 1987, must be made available for public inspection along with IRS Form 1023 or 1024 and any letters or documents issued by the IRS in response to the tax-exempt application. Copies of the IRS 990 annual returns must also be available for public inspection during normal business hours. Penalties will be imposed for failure to comply.
Q: What are the filing requirements for tax-exempt organizations?
A: Tax-exempt organizations must file Form 990, an annual information report, and annual report.
Q: May I prepare my own exempt application?
A: Yes, you may, but it is not advisable. Most problems arise from improperly completed applications. Technical help from a tax lawyer can avert problems in the application process.
Q: What is Unrelated Business Taxable Income?
A: Unrelated Business Taxable Income, commonly referred to as UBI, is income earned by the church which is not related to its tax-exempt function, such as income from a bookstore, restaurant, etc. Q: When is UBI taxable to an exempt organization?
A: This income is taxable if it is produced income from a trade or business, the trade or business is operated on a regular basis, and the trade or business does not relate to the church's tax-exempt function.
IV. Church/Nonprofit Accounting and IRS Compliance
Q: What accounting procedure will ensure compliance with IRS record-keeping requirements?
A: The church should retain any tax forms or tax returns filed for at least four years. Receipts from money spent related and not related to the tax-exempt function of the church should be retained. All records of compensation paid to non-ministerial and ministerial employees should be retained, as well as records of any rents or parsonage paid to them.
Q: What accounts should your organization maintain in its accounting system?
A: Payroll, Expenses, Equity (net worth), Petty Cash Fund and all Banking Accounts.
Q: What forms and documents should be used to record financial transactions/activities?
A: Cancelled checks, paid bills, duplicate deposit slips, balance sheets, inventory lists, and monthly/weekly summaries of income.
Excerpted from Economic Empowerment Through the Church by Gregory J. Reed Copyright © 1994 by Zondervan. Excerpted by permission.
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