Zondervan 2013 Church and Nonprofit Tax and Financial Guide: For 2012 Tax Returns


The Zondervan 2013 Church and Nonprofit Tax and Financial Guide annual reference guide continues to be one of the few resources offering tax and financial advice to churches and nonprofit organizations. Issues of financial accountability, receiving and maintaining tax-exempt status, accounting for charitable gifts, and other crucial topics receive careful and full discussion.

The 2013 edition also contains a thorough description of tax laws affecting churches and other nonprofit...

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The Zondervan 2013 Church and Nonprofit Tax and Financial Guide annual reference guide continues to be one of the few resources offering tax and financial advice to churches and nonprofit organizations. Issues of financial accountability, receiving and maintaining tax-exempt status, accounting for charitable gifts, and other crucial topics receive careful and full discussion.

The 2013 edition also contains a thorough description of tax laws affecting churches and other nonprofit organizations, ensuring compliance with all regulations. The book includes expert advice on handling charitable gifts, sample policies and procedures, easy techniques for simplifying financial policies and procedures, insights on medical expense reimbursements, key steps in sound compensation planning, and examples of required IRS filings.

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Product Details

  • ISBN-13: 9780310492320
  • Publisher: Zondervan
  • Publication date: 1/15/2013
  • Pages: 224
  • Product dimensions: 7.30 (w) x 9.00 (h) x 0.70 (d)

Meet the Author

Dan Busby is a certified public accountant with a Masters degree in business from Emporia State University. He has worked as controller of a university medical center, partner-founder of a CPA firm, and chief financial officer for a religious denomination. He currently serves as the president with the Evangelical Council for Financial Accountability, Washington, D.C, and is he coauthor of The Christian's Guide to Worry-Free Money Management.

John Van Drunen is an attorney and a certified public accountant with a Juris Doctor from Regent University School of Law and accounting degree from Anderson University. He has devoted much of his time to working in tax-exempt tax policy and other nonprofit related matters. He currently serves as vice-president and in-house legal counsel for the Evangelical Council for Financial Accountability, Winchester, VA.

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Read an Excerpt

Zondervan 2013 Church and Nonprofit Tax and Financial Guide

By Dan Busby Michael Martin John Van Drunen


Copyright © 2012 Dan Busby
All right reserved.

ISBN: 978-0-310-49232-0

Chapter One

Financial Accountability

In This Chapter

* Independent board

* Conflict of interest management

* Financial data oversight

* Compensation review and approval

* Proper stewardship practices

Financial accountability is a term commonly used in association with churches and other Christ-centered nonprofits. What the term means depends on the context, but it may raise some of the following questions:

* Does the organization have proper internal controls?

* Is there adequate financial oversight of the organization?

* Is the organization accountable to an external accreditation organization like ECFA (ECFA.org)?

* Does the organization have its financial statements audited, reviewed, or compiled by an independent certified public accountant?

* Does the organization measure the outcomes of its programs?

Financial accountability is based on the principle of stewardship (see pages 12-14 for the biblical basis of financial accountability). A steward-manager exercises responsible care over entrusted funds. Good stewardship rarely occurs outside a system of accountability.

Financial accountability has never been more important than it is today. While excellence in financial accountability is on the rise for many churches and Christ-centered nonprofits, fraud and other financial scandals continue to disgrace organizations and the name of Christ. The tension continues between investing the time and resources in demonstrating strong financial accountability versus utilizing the same resources primarily for programming. Financial accountability and strong programs is not an either/or proposition—it is both!

Adequate financial accountability enhances a Christ-centered organization's opportunities to effectively carry out the Great Commission. Financial accountability is strong evidence of organizational integrity. Accountability and integrity are foundational elements in keeping the financial wheels of an organization functioning smoothly. This all begins with a prioritization of these concepts by your board and staff.

How can your church or other nonprofit demonstrate strong financial accountability? There is not one "how to" guide that applies to all organizations. The size, type, and complexity of an organization dictate specific approaches. For example,

* A church with an average attendance of 250 generally does not have financial statements prepared by an independent CPA. Yet, they are often well-served to have an internal audit committee composed of church members review key aspects of the financial records.

* A nonprofit organization with annual revenues of $5 million almost always should have an annual audit by an independent CPA. However, additional procedures beyond the audit routine are often appropriate to ensure adequate checks and balances.

* An independent audit for a nonprofit organization with $50 million or more in annual revenues is just a starting point. An internal audit staff is often employed to enhance financial accountability.

Drawing on the wise counsel of those who have expertise in the area of financial accountability, a Christ-centered organization can prepare its own blueprint and be an example of how proper stewardship may be provided over funds provided by God.

Independent Board

The importance of an independent board cannot be over emphasized. The lack of independent board oversight can impact the accountability and effectiveness of the organization. In contrast, the independent board will determine the organization's mission, set long-range goals, provide fiduciary oversight, establish adequate board policies, and ensure consistent adherence to these policies.

To demonstrate board independence, a majority of the board should be other than employees or staff, or those related by blood or marriage, to ensure independence. Even when employee membership on especially if the majority of members in attendance at particular meetings are not independent. Employees often lack independence and objectivity in dealing with many board-level matters. While the organization's top leader is sometimes a member of an organization's board of directors, other staff members are generally not members of the board.

Finding a proper balance between the staff leadership of a church or other nonprofit organization and the board is fundamental. Any charity with too powerful or too weak a leader is a charity in trouble. When the top leader is too strong, it may be difficult for the board to provide adequate governance over the charity. Conversely, where the top leader is weak, boards or one or more board members often inappropriately move in and take over.

Does your board have robust discussions on key issues? Are the values and policies of the organization clearly articulated? Are annual evaluations, based on predetermined goals, made of the organization's leader (pastor, chief executive officer, president, or executive director)? Does the board evaluate itself as rigorously as it evaluates the organization's leader?

A board should generally meet at least semiannually, and many boards will meet more frequently. Each board should determine the appropriate number of meetings based on the nature of the organization. However, meetings held too frequently often result in the board being overly involved in management issues.

The actions of an organization's board and its committees should be recorded by written minutes, including the signature of the secretary, on a contemporaneous basis (within a reasonable time period after the meeting is held). Organizations filing the Form 990 must document whether minutes are contemporaneously kept by boards and committees with the authority to act for the board.

The actions of an organization's board often include the approval and revision of policies. These policies should be reflected in the board policy manual, with the manual updated as appropriate. Good Governance for Nonprofits, by Fredric L. Laughlin and Robert C. Andringa, is an excellent guide for preparing board policy manuals.

Conflict of Interest Management

The potential for a conflict of interest arises in situations in which a person is responsible for promoting one interest at the same time he or she is involved in a competing interest. If this person exercises the competing interest over the fiduciary interest, a conflict of interest has occurred.

Related-party transactions occur between two or more parties with interlinking relationships. These transactions should be disclosed to the governing board and evaluated to ensure they are made on a sound economic basis. The organization may decide to pursue any related-party transactions that are clearly advantageous to the organization.

Undertake significant transactions with related parties only in the following situations:

* The audited financial statements of the organization fully disclose related-party transactions.

* Related parties are excluded from the discussion and approval of related-party transactions.

* There are competitive bids or comparable valuations.

* The organization's board approves the transaction as one that is in the best interest of the organization.

Even when all of the above precautions are observed, the church or nonprofit organization may be at risk to criticism from donors, the media, or other members of the public. This risk may be so significant that it overshadows all of the benefits of the transaction.

Example 1: An organization purchases insurance coverage through a firm owned by a board member. This is a related-party transaction. If the cost of the insurance is disclosed, the purchase is subject to proper approvals, the price is equal to or below the competition's, the purchase is in the best interests of the organization, and the related party is not present at the meeting when the decision is made, the trans action does not constitute a conflict of interest.

Example 2: The CEO and several employees are members of the board. When the resolution on salary and fringe-benefit adjustments comes to the board, those affected by the resolution should not discuss and vote on the matter. The CEO and employees should also absent themselves from the meeting to avoid even the appearance of a conflict of interest.

Example 3: A nonprofit board considers a significant investment through a brokerage firm in which a board member has a material ownership interest. This investment might be approved if it is in the best interest of the nonprofit organization, is consistent with its investment policies, and meets its conflicts of interest policy.

Financial Data Oversight

Many churches and nonprofit organizations have an independent annual audit or review prepared by an independent certified public accountant (CPA). Compilations prepared by a CPA provide no assurance on the financial statements. "Agreed-upon procedures" may be appropriate in some situations (see page 136). In an agreed-upon procedures engagement, a CPA only focuses on certain issues that may be challenging for a particular organization; e.g., bank reconciliations, payroll tax returns, or expense reimbursements.

A good choice for your CPA firm is one that:

* Is thoroughly knowledgeable about current accounting standards and one that understands your niche of Christian nonprofits.

* Routinely prepares value-added management letters for its audit clients.

* Helps you minimize your fees.

* Understands your accounting system.

When an organization has an external audit or review, the board or a committee consisting of a majority of independent members should review the annual audit or review and maintain appropriate communication between the board and the independent CPA, meeting with the CPA at least annually.

If a charity does not have an annual external audit or review, an internal audit generally should be performed using written procedures (see pages 141-45). Very large charities often choose to have both an annual external audit and internal audits.

Compensation Review and Approval

An annual review of a church or nonprofit leader's compensation package is important, particularly when leadership compensation reaches more significant levels. Satisfying the following requirements creates a rebuttable presumption or "safe harbor" that the compensation for an organization's leader is reasonable:

* determine comparable pay for similar positions

* document gross pay and fringe benefits

* make compensation decisions in an independent setting (the individual whose compensation is being considered should be recused from the decision-making process)

The review should focus on all elements of pay, taxable and nontaxable, and an objective evaluation of responsibilities, goals reached, and available resources. A comparison with positions in other organizations may be helpful. National salary surveys may provide meaningful data.

With increased scrutiny of nonprofit salaries by the media, the government, and the public (see chapter 3), it is important that compensation amounts be accurately documented. Gross pay may include the following elements (some taxable and some tax-free or tax-deferred): cash salary; fair rental value of a house, including utilities, provided by the organization; cash housing or furnishings allowance; tax-deferred payments; value of the personal use of organization-owned aircraft or vehicle; value of noncash goods and services; and cash bonuses.

Proper Stewardship Practices

Communications with givers

All statements made by an organization in its stewardship appeals about the use of a gift must be honored. The giver's intent may be shaped by both the organization's communication of the appeal and by any giver instructions with the gift. Any note or correspondence accompanying the gift or conversations between the giver and donee representatives may indicate giver intent. If a donor responds to a specific appeal, the assumption is made that the giver's intent is that the funds will be used as outlined in the appeal.

All aspects of a proposed charitable gift should be explained fully, fairly, and accurately to givers. Any limitations on the use of the gift should be clear and complete both on the response form and in the appeal letter. These items should be included in the charity's communications to the donor:

* The charity's proposed use of the gift. Realistic expectations should be communicated regarding what the gift will do within the programs of the charity.

* Representations of fact. Any descriptions of the financial condition of the organization or narrative about events must be current, complete, and accurate. References to past activities or events should be appropriately dated. There should be no material omissions, exaggerations of fact, use of misleading photo graphs, or any other communication tending to create a false impression or misunderstanding.

* Valuation issues and procedures. If an appraisal is required, the giver should fully understand the procedures and who is responsible to pay for the appraisal.

* Tax consequences and reporting requirements. While tax considerations should not be the primary focus of a gift, the giver should clearly understand the current and future income, estate, and gift tax consequences, and reporting requirements of the proposed gift. A charitable gift should never be represented as a tax shelter.

* Alternative arrangements for making the gift. The giver should understand the current and deferred gift options that are available.

* Financial and family implications. In addition to the tax consequences, the overall financial implications of the proposed gift and the potential impact on family members should be carefully explained.

* Possible conflicts of interest. Disclose to the giver all relationships that might constitute, or appear to constitute, conflicts of interest. The disclosure should include how and by whom each party is compensated and any cost of managing the gift.

Handling gifts with restrictions by givers

Properly handling donor-restricted gifts is a challenge for many charities. This is because donor-restricted gifts present a complex combination of accounting, tax, legal, ethical, and other issues.

A donor's written instructions accompanying a gift may provide the basis for a gift restriction. However, in general, a donor's restriction may be either expressed or implied from relevant facts and circumstances. In some instances, the restrictions on donations are driven by the nature of a charity's appeal. For example, if the appeal describes a project, then any response to the appeal is restricted. In other cases, a donor approaches a charity desiring to make a restricted gift. Only donors can restrict a gift. In an accounting sense, gift restrictions are either temporary or permanent.

Designations of unrestricted assets or net assets by an organization's governing board do not create restrictions. Designations may be reversed by the board, and they do not result from a donor's contribution. For example, unrestricted assets or net assets do not become restricted merely because a board designates a portion of them to fund future expenditures for a new building.

In certain situations, donors have the power to unrestrict gifts. For example, a donor restricts a gift for a certain project. Later, the charity asks the donor's permission to redirect the gift for another purpose (unrestricted or restricted) and the donor agrees. The gift is then reclassified from either temporarily or permanently restricted to unrestricted.

Reporting for incentives and premiums

Fundraising appeals may offer premiums or incentives in exchange for a contribution. If the value of the premiums or incentives is not insubstantial, the donee organization generally must advise the donor of the fair market value of the premium or incentive and clarify that the value is not deductible for tax purposes either before or after the contribution is made (see page 169-70 for more detailed information).

Transparency to givers and the public

Churches and other nonprofits should make appropriate disclosures about its governance, finances, programs, and activities. As a demonstration of transparency, a charity should provide a copy of its current financial statements upon written request. Additionally, many nonprofit organizations are subject to the public disclosure rules requiring charities to provide copies of annual information returns (Form 990) and certain other documents when requested to do so (see pages 43, 48, and 50).

Compensation of gift planners

Payment of finders' fees, commissions, or other fees on a percentage basis by a charity to an outside gift planner or to an organization's own employees as a condition for delivery of a gift is not appropriate under ECFA Standards (and other industry standards). Competency-based pay is acceptable when it is paid to employees responsible for an organization's general fundraising program and includes a modest component for achieving broad fundraising goals.

Every effort must be made to keep donor trust. Donor attitudes can be unalterably damaged in reaction to undue pressure and the awareness that a direct commission will be paid to a fundraiser from his or her gift, thus compromising the trust on which the charity relies.

Acting in the interest of givers

Every effort should be made to avoid accepting a gift from or entering into a contract with a prospective donor that would knowingly place a hardship on the donor or place the donor's future well-being in jeopardy.

Fundraisers should recognize that it is almost impossible to properly represent the full interests of the donor and the charity simultaneously. When dealing with persons regarding commitments on major estate assets, gift planners should seek to guide and advise donors so that they may adequately consider the broad interests of the family and the various organizations they are currently supporting before they make a final decision. Donors should be encouraged to discuss the proposed gift with competent and independent attorneys, accountants, or other professional advisors.


Excerpted from Zondervan 2013 Church and Nonprofit Tax and Financial Guide by Dan Busby Michael Martin John Van Drunen Copyright © 2012 by Dan Busby. Excerpted by permission of ZONDERVAN. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Special Index for Church Treasurers v

Introduction viii

Recent Developments 1

2013 Filing Dates 10

1 Financial Accountability 11

Independent board 15

Conflict of interest management 16

Financial data oversight 19

Compensation review and approval 20

Proper stewardship practices 21

2 Tax Exemption 25

Advantages and limitations of tax exemption 26

Tax exemption for churches 27

Starting a church or other nonprofit organization 29

Unrelated business income 33

Private benefit and private inurement 40

Filing federal returns 43

Postal regulations 52

State taxes and fees 52

Political activity 55

3 Compensating Employees 57

Reasonable compensation 57

Housing and the housing allowance 58

Deferred compensation 63

Maximizing fringe benefits 64

Nondiscrimination rules 78

Paying employee expenses 79

4 Employer Reporting 83

The classification of workers 83

Reporting compensation 88

Payroll tax withholding 88

Depositing withheld payroll taxes 92

Filing quarterly payroll tax forms 92

Filing annual payroll tax forms 95

5 Information Reporting 105

General filing requirements 105

Reporting on the receipt of funds 107

Reporting on the payment of funds 107

Summary of payment reporting requirements 115

6 Financial Records and Reporting 117

Recordkeeping of income and expenses 118

Accounting records 125

Financial reports 129

Budgeting 135

Audits and other related services 135

Fraud 136

7 Charitable Gifts 147

Charitable gift options 148

Percentage limitations 151

Gifts that may not qualify as contributions 152

Charitable gift timing 154

Acknowledging and reporting charitable gifts 155

Quid pro quo disclosure requirements 168

Donor-restricted gifts 173

Contributions to support missionaries and other workers 176

Short-term mission trips 180

Other special charitable contribution issues 192

Citations 207

Index 210

10 Biggest Tax and Financial Mistakes Made by Churches and Nonprofits

10 Tax and Finance Questions Most Frequently Asked by Churches and Nonprofits

Unrelated business income 33

Political activity 55

Employee compensation


Deferred compensation 63

Dependent care assistance plan 68

Disability insurance 74

Expense reimbursements 79

403(b) plans 63

Health care 68

Housing allowances 58

Loans to employees 74

Medical expense reimbursement 72

Moving expenses 76

Overtime and minimum pay 77

Property transfers 75

Social security reimbursement 75

Vehicles provided to employees 75

Workers' Compensation 76

Workers at the church

Are ministers employees or independent contractors? 84

Assignment of ministers 86

Depositing withheld payroll taxes 92

Filing quarterly payroll tax returns 92

Filing Form W-2 95

Special tax provisions for ministers 87

Withholding FICA taxes 88

Withholding federal income taxes 89

Information return filings

Interest payments 107

Payments to nonresident aliens 109

Payment for services 110

Payments to volunteers 112

Payment of moving expenses 112

Receipt of mortgage interest 107

Financial records of the church

Budgeting 135

Chart of accounts 119

Financial reports 129

Guidelines for handling offerings 120

Internal audit guidelines 141

Charitable contributions

Contributions to support: missionaries or workers 176

employees of a charity 193

individuals other than staff members or the needy 195

the needy 195

short-term mission trips 180

Contributions by volunteers 198

Donor privacy 201

Gifts that may not qualify as contributions 152

Granting of scholarships 197

Letter to noncash donors 158

Quid pro quo disclosures 168

Private schools 192

Receipting charitable contributions 155

Refunding gifts or sending contributions to another charity 198

Reporting noncash gifts to the IRS 161

Insurance for the church

Disability 74

Health 68

Workers' Compensation 76

Key laws that apply to churches

Fair Labor Standards Act 77

Immigration control 113

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