Zondervan 2010 Church and Nonprofit Tax and Financial Guide: For 2009 Tax Returns

Zondervan 2010 Church and Nonprofit Tax and Financial Guide: For 2009 Tax Returns

by Dan Busby, CPA

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Product Details

ISBN-13: 9780310327837
Publisher: Zondervan
Publication date: 01/08/2010
Pages: 224
Product dimensions: 7.30(w) x 9.00(h) x 0.80(d)
Age Range: 18 Years

About 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.

Read an Excerpt

Zondervan 2010 Church and Nonprofit Tax and Financial Guide

For 2009 Tax Returns
By Dan Busby

ZONDERVAN

Copyright © 2010 Dan Busby
All right reserved.

ISBN: 978-0-310-32783-7


Chapter One

Tax Exemption

In this Chapter

* Advantages and limitations of tax exemption

* Tax exemption for churches

* Starting a church or other nonprofit organization

* Unrelated business income

* Private benefit and private inurement

* Filing federal returns

* Postal regulations

* State taxes and fees

* Political activity

Qualifying tax-exempt organizations have many advantages. One of the most important benefits is the eligibility to attract deductible charitable contributions from individual and corporate donors. The potential exemption from tax liability, primarily income, sales, and property tax, is also important. There are many exceptions to these exemptions.

The term "nonprofit organization" covers a broad range of entities such as churches, colleges, universities, health care providers, business leagues, veterans groups, political parties, country clubs, and united-giving campaigns. The most common type of nonprofit is the charitable organization.

The nonprofit organization concept is basically a state law creation. But tax-exempt organizations are based primarily on federal law. The Internal Revenue Code does not use the word "nonprofit." The Code refers to nonprofits as exemptorganizations. Certain state statutes use the term "not-for-profit." A not-for-profit organization under state law may or may not be tax-exempt under federal law. In this book, the term "nonprofit" refers to nonprofit organizations that are exempt from federal income tax.

Advantages and Limitations of Tax Exemption

Upon approval by the IRS, tax exemption is available to organizations that meet the requirements of the tax code. This exemption provides relief from federal income tax. This income tax exemption may or may not extend to local and state income taxes. Even if an organization receives tax-exempt status, certain federal taxes may still be imposed. There may be tax due on the unrelated business income, tax on certain "political" activities, and tax on excessive legislative activities.

Tax exemption advantages

Besides the basic exemption from federal income and excise taxes, an organization that is recognized as a charitable organization under the Internal Revenue Code enjoys several advantages:

* Its donors can be offered the benefit of a deduction for contributions.

* It can benefit from using special standard nonprofit mail rates.

* It is in a favored position to seek funding from foundations and other philanthropic entities, many of which will not support organizations other than those recognized as tax-exempt organizations under 501(c)(3).

Remember

A tax-exempt organization usually means the entity is exempt, in whole or in part, from federal income taxes. The entity may still be subject to social security taxes and certain excise taxes. Nonprofit organizations may be subject to taxes at the state level on income, franchise, sales, use, tangible property, intangible property, and real property.

* It is eligible for government grants available only to entities exempt under 501(c)(3).

* It often qualifies for exemption not only from state and local income taxes but from property taxes (for property used directly for its exempt function) and certain sales and use taxes as well.

* It may qualify for exemption from the Federal Unemployment Tax Act in certain situations.

* Its employees may participate in 403(b) tax-sheltered annuities.

* It is an exclusive beneficiary of free radio and television public service announcements (PSAs) provided by local media outlets.

* If it is a church or a qualified church-controlled organization, it may exclude compensation to employees from the FICA social security base. The organization must be opposed on religious grounds to the payment of FICA social security taxes. The social security liability shifts to the employees of the electing organizations in the form of SECA social security tax.

Tax exemption limitations

Offsetting the advantages of tax-exempt status are some strict requirements:

* An organization must be engaged "primarily" in qualified charitable or educational endeavors.

* There are limitations on the extent to which it can engage in substantial legislative activities or other political activities.

* An organization may not engage in unrelated business activities or commercial activities to an impermissible extent.

* There is a prohibition against private inurement or private benefit.

* Upon dissolution, the organization's assets must be distributed for one or more exempt purposes.

Tax Exemption for Churches

Tax law and IRS regulations do not define "religious." But the courts have defined "religious" broadly. In part, because of these constitutional concerns, some religious organizations are subject to more lenient reporting and auditing requirements under federal tax law.

The "religious" category includes churches, conventions of churches, associations of churches, church-run organizations (such as schools, hospitals, orphanages, nursing homes, publishing entities, broadcasting entities, and cemeteries), religious orders, apostolic groups, integrated auxiliaries of churches, missionary organizations, and Bible and tract societies. IRS regulations define religious worship as follows: "What constitutes conduct of religious worship or the ministration of sacerdotal functions depends on the interests and practices of a particular religious body constituting a church."

Although not stated in that tax law, the IRS generally applies the following 14 criteria to decide whether a religious organization can qualify as a "church":

* Distinct legal existence * Recognized creed and form of worship * Definite and distinct ecclesiastical government * Formal code of doctrine and discipline * Distinct religious history * Membership not associated with any other church or denomination * Organization of ordained ministers * Established places of worship * Literature of its own * Ordained ministers selected after completing prescribed courses of studies * Regular congregations

Remember

All churches are religious organizations, but not all religious organizations are churches. While many churches have steeples, the definition of a church for IRS purposes is much broader. The term "church" may include religious schools, publishers, television and radio broadcasters, rescue missions, religious orders, and other organizations. * Regular religious services * Sunday schools for religious instruction of the young * Schools for preparation of its ministers

Churches receive favored status in that they are not required to file either an application for exemption (Form 1023) or an annual report (Form 990) with the IRS. A church is still subject to filing and disclosing an annual report on unrelated business income (Form 990-T) and Form 5578 for private schools as well as payroll tax, sales tax, and other forms, if applicable. Individuals employed by churches qualify more easily for the special ministerial tax treatments, including a housing allowance.

Because of the highly restrictive requirements of the Church Audit Procedures Act, churches are subject to IRS audits only when an appropriate high-level Treasury official makes a reasonable believe determination that a church may not qualify for tax-exempt status. However, this audit restriction does not apply to a church that is not filing or paying payroll taxes, to criminal investigations, to separately incorporated private schools, or to any inquiry relating to the tax status or liability of persons other than the church, such as ministers or contributors.

Starting a Church or Other Nonprofit Organization

The choice of a nonprofit organizational form is a basic decision. Most churches are unincorporated associations. However, many churches incorporate for the purpose of limiting legal liability. Most other nonprofit organizations are corporations. While incorporation is usually desirable for churches and other nonprofit organizations, it is generally not mandatory.

Organizations using the corporate form need articles of incorporation and bylaws. An unincorporated organization will typically have the same instruments, although the articles may be in the form of a constitution.

Several planning questions should be asked. If the organization is formed for charitable purposes, is public status desired or is a private foundation acceptable? Are any business activities contemplated, and to what degree will the organization be incorporated? Is an attorney competent in nonprofit matters available to help with the preparation of the legal documents? What provisions will the bylaws contain? Who will serve on the board of directors? What name will be used for the organization?

Key Issue

If a church or other nonprofit organization wishes to incorporate, it must file articles of incorporation with the appropriate state. Some states also require the filing of trust documents. Following incorporation, the new entity should conduct an organizational meeting of the initial board of directors, adopt bylaws, and elect officers.

The following materials may provide useful information when starting a church or other nonprofit organization:

Package 1023 Application for Recognition of Exemption with Instructions

Publication 557 Tax-Exempt Status for Your Organization

Obtaining an employer identification number

All entities, whether exempt from tax or not, must obtain an employer identification number (EIN) by filing IRS Form SS-4. An EIN is required for a church even though churches are not required to file with the IRS for tax-exempt status. This number is not a tax-exempt number, but is simply the organization's unique identifier in the IRS's records, similar to an individual's social security number.

When an organization is approved by the IRS for exemption from federal income tax (not required for churches), it will receive a "determination letter." This letter does not assign the organization a tax-exempt number.

If an organization is a "central organization" that holds a "group exemption letter," the IRS will assign that group a four-digit number, known as its group exemption number (GEN). This number must be supplied with the central organization's annual report to the IRS (updating its list of included subordinate organizations). The number also is inserted on Form 990 (if required) of the central organization and the subordinate organizations included in the group exemption.

When an organization applies for exemption from state or local income, sales, or property taxes, the state or local jurisdiction may provide a certificate or letter of exemption, which, in some jurisdictions, includes a serial number. This number is often called a "tax-exempt number." This number should not be confused with an EIN.

Application for recognition of tax-exempt status

Although a church is not required to apply to the IRS for tax-exempt status under Section 501(c)(3) of the Internal Revenue Code and is exempt from filing Form 990, it may be appropriate to apply for recognition in some situations:

* National denominations typically file for group exemption to cover all local congregations. A copy of the national body's IRS determination letter may be used by the local group to provide evidence of tax-exempt status. Independent local churches that are not a part of a national denominational body often file for tax-exempt status to provide evidence of their status. The local congregation may wish to file for group exemption if it is a parent church of other local congregations or separately organized ministries.

Filing Tip

The filing for tax-exempt status by a parachurch ministry will determine whether the organization will be recognized as tax-exempt, whether it will be eligible to receive deductible charitable contributions (and sometimes to what extent),and whether the organization will be a public charity or a private foundation.

(Continues...)



Excerpted from Zondervan 2010 Church and Nonprofit Tax and Financial Guide by Dan Busby Copyright © 2010 by Dan Busby . Excerpted by permission.
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.

Table of Contents

Contents

Special Index for Church Treasurers....................v
Introduction....................viii
Recent Developments....................1
1 Financial Accountability....................11
Independent board....................15
Conflict of interest management....................16
Financial data oversight....................19
Compensation review and approval....................20
Proper stewardship practices....................20
2 Tax Exemption....................25
Advantages and limitations of tax exemption....................25
Tax exemption for churches....................27
Starting a church or other nonprofit organization....................28
Unrelated business income....................32
Private benefit and private inurement....................39
Filing federal returns....................42
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....................65
Nondiscrimination rules....................76
Paying employee expenses....................77
4 Employer Reporting....................81
The classification of workers....................81
Reporting compensation....................85
Payroll tax withholding....................86
Depositing withheld payroll taxes....................89
Filing the quarterly payroll tax forms....................90
Filing the annual payroll taxforms....................93
5 Information Reporting....................103
General filing requirements....................103
Reporting on the receipt of funds....................105
Reporting on the payment of funds....................105
Summary of payment reporting requirements....................113
6 Financial Records and Reporting....................115
Recordkeeping of income and expenses....................116
Accounting records....................123
Financial reports....................127
Budgeting....................143
Audits and other related services....................143
7 Charitable Gifts....................151
Charitable gift options....................152
Percentage limitations....................155
Gifts that may not qualify as contributions....................156
Charitable gift timing....................158
Acknowledging and reporting charitable gifts....................160
Quid pro quo disclosure requirements....................172
Donor-restricted gifts....................177
Contributions to support missionaries and other workers....................180
Short-term mission trips....................184
Other special charitable contribution issues....................192
Citations....................207
Index....................210
10 Biggest Tax and Financial Mistakes Made by Churches and Nonprofits....................213
10 Tax and Finance Questions Most Frequently Asked by Churches and Nonprofits....................214

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