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Be Careful when Claiming Charitable Contributions

9/29/2016

Over the years our Government and the Internal Revenue Service (IRS) has stripped away at our allowable deductions for income tax purposes. The supposed reasoning was to streamline the tax code and bring more revenue into the Government coffers. However, the tax code has not been streamlined or simplified, and regardless of the amount of revenue, the Government continues to outspend income.

One of the few deductions remaining for the average tax payer is that of Charitable Contributions. Churches depend on the money donated to them on any given Sunday to offset their weekly budgets, and the generosity of so many who donate to Churches and Ministries, are motivated by the fact that they are still allowed to deduct those gifts from their annual income tax return.

With all of this said, there are some issues of which we need to be aware.

Do Not Earmark Donations for Specific Individuals

Private Inurement is a “no no” for Churches. The Inurement clause states that Churches are not allowed to benefit private individuals. According Eric Roberts from the IRS, if anyone earmarks a donation for a private individual, the donation will not be allowed.

The Church counting office or Treasurer should have a rubber stamp that declares, “Not for Contribution Credit,” and every donation earmarked for benefitting an individual should be clearly documented as such.

Giving donation credits to individuals who are not authorized them, may invoke civil and criminal penalties to the responsible parties of that particular Church. Do Not Test the Waters, or Seek to Circumvent This!

Do Not Allow Bartering

A common practice within Church circles is people, especially Church members, who will buy items for the Church, donate them, and then want contribution credit. This practice may be costly for the Church and/or the individual.

Do not allow people to purchase flower arrangements to place on the pulpit for Sunday service and then want contribution credit. Do not allow them to buy supplies, equipment or donate time, for contribution credit. Instead, have them donate the dollar amount of the item or supplies they want to give the Church and then the Church make the purchase. This may seem a little asinine, but it will protect all parties, and the dollar donation amount (unless earmarked for the benefit of a specific individual) will be an allowable deduction.

If they insist on giving the item, instead of cash, only write a letter describing in entirety what was donated. Do not place a dollar amount on the letter. Leave any amounts to be determined by the individual and his or her tax preparer.

Make sure that all donations are either, Tithes, Offerings, Mission Fund, or Building Fund. Do not think you can slip something by the IRS. They know what to look for on a tax return. Cheating on your donation credit is not going to reduce your tax liability enough to make it worth you going to prison. “Give to Caesar that which belongs to Caesar” and you will not have any problems.

How We Can Help

These and other “hot topic” IRS issues are discussed in-depth at our Church Management and Tax Conferences across the USA. After attending one, the Pastor and Church Leaders will have clear direction on what they can and cannot do. Pastor, Church Leader, Do Not Think you can do Church books without the instruction you will receive at one of these conferences.

This is why it is vital for each Pastor and Church Leader to attend the conference nearest them, NOW! Your procrastination may be the downfall of your Church and Ministry. Contact us today to register by visiting www.cmtc.org or call us at 800-344-0076. You will be glad you did.

Remember, for others, this is a job, but for us “It is A Ministry!”

By Dr. Michael Chitwood

Improper Classification Can Be Costly

9/27/2016

One of the biggest mistakes Churches make, that get them into trouble with the Internal Revenue Service, is the practice of misclassifying employees. Churches have a bad practice of paying people in the Church and providing a 1099 instead of a W-2. This practice recently cost a Church in Michigan huge penalties, including a multi-million dollar lien on their property. To help clarify who is and who is not an employee, let’s apply a test for each.

An Employee

Anyone that meets any of the following is an employee and should get a W-2.

- Employer has the right to direct and control the worker (even if he does not do so)
- Paid on an hourly, weekly, or monthly basis
- Uses equipment, tools, and materials provided by the employer
- Receives predetermined earnings and cannot realize significant profits or loss
- Schedule dictated by the employer
- Trained by the employer, either formally or informally
- Receives benefits, such as insurance, pension, or paid vacation or sick leave
- The relationship between employer and worker is ongoing – not on a job or project basis

The very first one should be enough to seal the issue, but if it doesn’t convince the Pastor and Board who is an employee, the rest of the bullets should.

A Non-Employee

A non-employee would be governed by the following and should get a 1099:

- A contract stating the worker is an independent contractor, although this is not determinative (employees can also work by contract, or agreement)
- Free to determine how the work gets done
- Paid for each individual job
- Uses his own equipment, tools, or materials
- Can personally realize significant profits or losses in the business
- Works temporarily or on individual jobs

A Simple Definition

A simple definition that is easily understandable would be this. An employee is anyone on the inside of your Church or connected to it, that does some work, and is paid by the Church. That individual would get a W-2.

A non-employee is anyone from outside of your Church, not connected to it, who does any work and is paid. That person would get a 1099.

Let’s Tie it All Together

Musicians, nursery workers, janitors, and those doing lawn care are not independent contractors if they attend the Church and the Church has the right to direct or control their work and pays them hourly, weekly, or monthly, and those workers cannot suffer any significant loss or gain.

I have had Churches quickly inform me that their musicians were independent contractors simply because they used their own equipment and provided the music for more than one Church on Sundays. Let’s address each of those.

The equipment issue: The definition of employee is one that meets any of the previous mentioned. Most guitar and bass players use their instruments because they are comfortable with them and those instruments are easily transportable. Guitar and bass players like a certain feel to their instrument – i.e. the height of the frets, how easily transitions can be unnoticeably made, etc. Drums, organs, keyboards or pianos, are entirely different. They are too bulky to be hauled in an out of a Church every service and most Churches have these instruments in place on the platform.

The number of Churches for which they play on a given Sunday issue: Many musicians adamantly claim their independent contractor status because of this. However, let’s look at it from a non-church perspective. If someone works two or three part-time jobs, for instance they work for McDonald’s, Burger King, and Wendy’s, do they only get a W-2 from the one that first hired them and a 1099 from the other two? No! Even if they work the same day at each establishment, each of them would provide the worker with a W-2.

Another issue that is raised by Churches and musicians is that of fill-in musicians. Again, let’s look at the non-church perspective. If you go to work for McDonald’s and work only one day, McDonald’s does not give you a 1099—they give you a W-2.

Why Your Church Needs Us

It is not what you know that will hurt you; it is what you do not know. Cheap advice is expensive. I have encountered countless Pastors and Church Leaders who have been devastated by the advice from a local CPA. Some of these Pastors and Leaders have incurred huge fines and penalties, and some have even faced criminal charges.

Chitwood & Chitwood has provided Church and Clergy Tax Management for more than 78 years. We are the best. We know what others do not know, and how to ensure that every Church properly apply the regulations within their local House of Worship.

Every Pastor and Church Leader should immediately attend the soonest Church Management Conference nearest them. To register, visit us at www.cmtc.org or call 800-344-0076.

For others this is a job, but for us “It is A Ministry!”

Be Careful when Claiming Charitable Contributions

Do Not Earmark Donations for Specific Individuals

Do Not Allow Bartering

How We Can Help

By Dr. Michael Chitwood

Improper Classification Can Be Costly

An Employee

A Non-Employee

A Simple Definition

Let’s Tie it All Together

Why Your Church Needs Us

By Dr. Michael Chitwood​

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By Dr. Michael Chitwood