ECCU Blog

I was sitting at a luncheon where Frank Sommerville, a leading nonprofit attorney, was providing an update on legal and tax issues. He brought up a 2012 tax court case where the IRS disallowed contributions in the amount of $25,171 because the church contribution tax receipt didn’t contain the right disclaimer.

In the case, Durden v. Commissioner, U.S Tax Court Memo 2012-140, the IRS disallowed this contribution. The critical disclaimer on the donors’ receipt was missing the phrase, “No goods or services were provided in exchange for these donations except for general religious benefits.” The case went on to say the omission could not be corrected by a new receipt issued after the taxpayers had filed their tax return.

At my church, we changed our software system this past year, but unfortunately the default message on our contribution receipts didn’t include this IRS required disclaimer. So before we printed and sent our year-end receipts, we made sure we changed the wording to include this disclaimer.

How about your ministry? Does your donation receipt contain this disclaimer? If not, your donors’ contributions can be disallowed by the IRS.

Enough said. Okay, time to go check your donation receipts!

According to the IRS, the recent sequestration which has gone into effect is imposing automatic cuts to the Small Business Health Care Tax Credit claimed by many small ministries. As a result, the portion of your claim will be reduced by 8.7%. The sequestration reduction rate will be applied until the end of the fiscal year (Sept. 30, 2013) or intervening Congressional action, at which time the sequestration rate is subject to change.  Check the IRS’s notice for more information.

Taxes have gone up and we are all concerned about the potential negative impact on giving to our ministries. Should we be bracing for lower donations, or is it possible the tax code changes could actually be beneficial?

To find out, let’s take a look at several provisions in the new tax code.

Tax Rates. The tax rates went up for the highest income earners, as you can see here. 

Before looking at an example of the new tax rate’s impact for a high income earner, let’s look at another provision.

Itemized Deductions. Itemized deductions for higher income earners has a phased out provision. Coupled with the higher tax rate, this sounds like it will create a double blow to our largest donors. Here are the details on this phase-out provision: Singles with incomes over $250,000 and couples with incomes over $300,000 lose the lesser of 3% itemized deductions above this threshold or 80% of allowable deductions.

This can all be confusing, so here is an example of the impact the changes in tax rates and itemized deductions will have:

Under the new tax code, a couple with an adjusted gross income of $650,000 and itemized deductions of $75,000 will lose $10,500 in itemized deductions because of the phase-out limitation of itemized deductions while the taxes paid by this couple will increase $30,608 over 2012 rates.

This sounds like it could have an equally negative impact for our ministries since donors now have less incentive to give. But before we jump to that conclusion, let’s keep going with this example to see the potential impact if this couple were to increase their giving.

If this same couple donates an additional $10,000 to your ministry, their taxable income would decrease by $9,700, thus saving taxes paid  at the higher rate of 39.6% or $3,841. This is a $341 increase in tax savings for the additional $10,000 gift compared to 2012, when the top tax rate was 35%.

(To see all the details and calculations behind this example, click here.)

The Commission on Accountability and Policy for Religious Organizations just published their report, which was presented last week to Senator Charles Grassley. The report is based on two years of work by 80 nonprofit, tax, and legal experts and leaders, including ECCU President/CEO Mark G. Holbrook. It promotes solutions to key policy issues related to financial accountability in the religious and broader nonprofit sector.

The Evangelical Council for Financial Accountability (ECFA) led the effort to form the Commission and has made the 94 page report available for review.

Among its contents, the report covers the following topics and includes 43 recommendations related to:

• Executive Compensation and Excess Benefit Transactions
• Clergy Housing Exclusion
• Churches, Accountability, and Donor Engagement
• IRS Advisory Committee for Religious Organizations
• Independent Accreditation and ECFA’s Model
• Religious Organization Examinations and Third-Party Oversight
• Examinations of Church Leaders
• Love Offerings
• Public Disclosure of Highly Sensitive Information

I think you will find this to be very helpful information which can lead all of us in the nonprofit community to better governance, accountability, and transparency without greater government oversight or regulation. I highly recommend you take a look at the report and let me know what you think.

It’s the time of year we commonly announce and collect special gifts, often called “love offerings,” for our ministry staff. Proper handling of these gifts can be complex. The IRS has ruled on a number of cases that provide guiding principles for both donors (as to tax deductibility of the gift) and recipients (as to whether the gift should be treated as income).

•  If a gift is made directly from a donor to a staff member without any involvement by the organization, the gift would not be tax deductible by the donor and not taxable income for the recipient. The key here is that the funds are strictly a personal gift and don’t constitute compensation. The IRS does limit these gifts to $13,000 annually (rises to $14,000 in 2013).
•  If a qualified nonprofit receives a gift for a particular staff member which is not intended for use by the organization, the gift is not tax deductible by the donor. However, the funds distributed to the staff are considered taxable income and should be added to their W-2 wages (for an employee) or reported on Form 1099-MISC (for an independent contractor). Section 102(c)(1)(a) of the IRS Code states that “any amount transferred by or for an employer to, or for the benefit of, an employee is not excludable from gross income as a gift.”
•  If a qualified nonprofit preauthorizes a love gift fund for staff and maintains adequate discretion and control over distribution of those funds among the staff, the donations are tax deductible. Again, in this case, the funds distributed to the staff are considered taxable income and added to their W-2 wages or reported on Form 1099-MISC. Adequate discretion and control would include determining the distribution of funds among the staff as well as ensuring that the staff does not receive more than a reasonable amount of compensation through a love gift. For example, if the organization received a gift of $1 million in the love offering fund, it would need to ensure that total compensation did not represent unreasonable compensation for the staff. Most likely this would mean not distributing the entire amount to the staff.

See what I mean about this being a complex issue? “Love offering” sounds so simple, until you read the IRS Code. For this reason, I offer the following fine print:

This post is provided by ECCU for educational purposes only. It is not intended to be legal or accounting advice. ECCU disclaims any liability arising out of your use of, or any financial position taken in reliance on, information provided in this post.