Reporting Issues

Possible New Reporting Requirements for Churches

As noted in an earlier posting, the Religious Policy Commission issued a report to Senator Grassley (R-IA) in December 2012 in which they made recommendations for Congressional and IRS oversight over churches and religious organizations. The following new requirements were recommended for churches. First, the largest churches should participate in a survey of executive compensation so that comparable data can be gathered and reported to the public. Names of churches and staff members would not be identified – only the summary data. Secondly, the IRS should provide guidelines for when it is appropriate for charities to use compensation data from the commercial sector when setting executive compensation.

IRS Raises Amounts for Token Items Given to Donors

Typically, for any gift over $75, charitable organizations must provide a written disclosure including an estimate of the fair market value of the items provided to the donor. However, this disclosure is not required in certain circumstances, such as when the gift is of a certain minimum amount and the items provided are “token items”, which are defined as low-cost items bearing the logo, colors or other identification of the organization. The amount that is considered “low-cost” is adjusted each year for inflation. For 2013, items with a cost of $10.20 or less are consider low-cost token items. The minimum amount of the gift must be $51 or more. Another exception to the disclosure rule is when an “insubstantial benefit” is provided to the donor, provided the benefit does not exceed 2% of the amount of the gift or a maximum of $102. For example, if the donor makes a contribution of $5,000, the charity could provide a benefit with a value up to $100 (2% of $5,000) without any disclosure requirement. See IRS Publication 1771 and Rev. Proc. 2012-41; 2012-45 IRB 1 for more information.

Off Duty Police Officer is Independent Contractor

Many churches hire off duty policemen to assist with traffic control or provide security, and the question normally arises as to whether to treat them as part-time employees or independent contractors. Wages paid to a part-time employee would be subject to tax withholdings, and the individual could become eligible for other employee benefits. On the other hand, payments to an independent contractor are not subject to withholdings, and the person is not eligible for employee benefits. A recent tax court case considered this issue, and in this case, the off duty policemen was considered to be an independent contractor. He was paid by the hour, and the company that hired him did not provide him with any training or control the details of his job. He provided his own uniform and carried his own gun. His pay was reported on Form 1099-MISC, and he was required to report the income as a self-employed independent contractor. For more information about the case see http://www.ustaxcourt.gov/InOpHistoric/Specks.TCM.WPD.pdf

Report on Accountability for Religious Organizations Released December 4, 2012

The Commission on Accountability and Public Policy for Religious Organizations has released its long-awaited report to Sen. Charles Grassley (R-IA) with their recommendations for government oversight of religious nonprofit organizations including churches. The report addresses areas such as executive compensation, housing allowance, IRS registration and tax reporting requirement for churches, and IRS audits of churches. The Commission takes a very strong stand against further intrusion by the government into the oversight of churches. However, the commission does make recommendations for better practices of developing systems for accountability and controls over executive compensation. To request a copy of the complete report, go to:
http://religiouspolicycommission.org/

IRS (Finally) Agrees to LLC Subsidiary Charitable Deduction

Many nonprofit organizations conduct certain operations related to their charitable activities through a separately formed Limited Liability Company (LLC). Under existing US tax law, an LLC that is wholly owned is disregarded for tax purposes and its activities are combined with its owner. Thus, nonprofit organizations utilizing LLC’s assumed that the operations of their LLC entities would qualify as tax exempt and contributions to those LLC’s would be allowed as tax deductible. But clear guidance from the IRS on this issue was not forthcoming until this week when it issued Notice 2012-52 making it clear that donations to charity owned LLC qualify as tax deductible. This guidance is effective as of July 31, 2012; however, taxpayers can rely on this ruling for earlier tax years for which the statute of limitations for refunds or credits hasn’t expired under IRC Section 6511. See IRB 2012-35, 7/31/2012 which will be posted at http://www.irs.gov/irb/

Contribution Receipts – The Letter of the Law

David & Veronda Durden learned the hard way that the exact wording of the receipt from their church was of utmost importance when claiming a tax deduction. Because the church failed to include the words “No goods or services were provided in exchange” for their contributions, the IRS denied the deduction. The church provided a revised receipt, but it was too late. The receipt from the church must be provided prior to filing the tax return. The Durdens took the case to Tax Court, but on May 17, 2012, the court agreed with the IRS. The receipt was faulty and did not comply with IRC Section 170(f)(8) as contemporaneous substantiation of the contribution.
See the court ruling at http://www.ustaxcourt.gov/InOpHistoric/DurdenMemo.TCM.WPD.pdf

President Signs Repeal of Expanded 1099 Requirements

As expected after a great public outcry and recent action in Congress, on April 14, 2011 President Obama signed into law the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 (HR 4; 1099 Act), which repeals both the expanded Form 1099 information reporting requirements and also the 1099 reporting requirements imposed on taxpayers who receive rental income. This removes the requirement to provide 1099s to corporations (other than law firms) and for the purchase of products and tangible property and reverts to the 1099 reporting requirements to the existing rules.

2012 Budget Proposal Limits Charitable Contribution Deduction

The President proposes to limit, starting in 2012, itemized deductions (including charitable contributions) for married taxpayers with income over $250,000 and single taxpayer with income over $200,000. President Obama explained that his 30% reduction in itemized deductions for high-income taxpayers is necessary in order to pay for a 3-year fix to the AMT (alternative minimum tax). The proposal limits the tax rate at which high-income taxpayers can take itemized deductions to a maximum of 28%. The language is found on page 212 of the Federal Receipts portion of the proposed budget (see at http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/r...)

Can Ministers Exclude Housing Allowances for More than One Home?

The Tax Court, in a divided decision, said yes to a minister that received an allowance for a second home that he had on a lake. The court rejected the IRS argument that the tax free allowance is limited to a single residence. More on this as it unfolds.

A Step in the Right Direction: Senate Votes to Repeal of the Expansion of Form 1099 Filing Requirements

The Senate, by a 81-17 vote, approved an amendment to repeal a health care reform provision that would have had a major paperwork burden on churches and ministries. The provision would have required churches, ministries, and businesses to report to the IRS any purchase of more than $600 of goods or services from any vendor. This requirement, scheduled to go into effect in 2012, greatly expanded the current 1099 requirement that applies only to payments to unincorporated providers, and only for services.

Let’s hope the House will follow the Senate’s lead, and do it quickly.