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New
Electronic Filing Requirements for Small Tax-Exempt Organizations -
Annual Electronic Notice - e-Postcard (Form 990-N) Small
tax-exempt organizations, whose gross receipts are normally $25,000 or
less, are not required to file Form 990 or Form 990-EZ. Beginning in
2008, small tax-exempt organizations that previously were not required
to file returns may be required to file an annual electronic notice,
Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt
Organizations not Required To File Form 990 or 990-EZ. This filing
requirement applies to tax periods beginning after December 31, 2006.
If you are not sure whether your organization will be required to file
the new Form 990-N, please consult with your CPA or Tax Advisor. If you
need further information, please feel free to
contact us. (by clicking here) |
| Congress
enacted major tax bills in 2001, 2003, 2004 and 2005 containing several
provisions that will affect tax reporting by both ministers and churches
for 2005 and future years. Many of the changes are geographical by
statute, but most will apply nationally. Several common questions and
answers are listed below for your information.
Click here
for Q & A. Here is a run
down of some of the key provisions: |
 |
| (1) Congress passed the Energy Tax
Incentives Act to encourage energy efficiency and reduce dependence on
foreign oil. The Act provides tax credits for (1) energy efficient
residences; (2) solar water heating devices and (3) hybrid cars.
(2) Congress passed the Katrina Emergency Tax
Relief Act. This legislation provides tax relief for individuals and
families, along with incentives for charitable donations. Some of he
main provisions include the following: |
- Persons affected by the hurricane are not
taxed on personal debt reduction or cancellation related to the
hurricane, such as cancellation of a mortgage, provided before 2007.
- Persons who provide rent-free housing to
dislocated persons for at least 60 days are given a special tax
deduction of $500 for each dislocated person housed in the
individual's principal residence (up to a maximum of $2,000). The
deduction can be claimed in either 2005 or 2006, but cannot be
claimed in both years with respect to the same person.
- Under current laws, individuals who itemize
their deductions may deduct personal casualty losses to the extent
they exceed 10% of the adjusted gross income and a $100 floor. The
Act waives the 10% and $100 floors for affected persons, allowing
them to fully deduct their losses.
- The Act permits affected individuals to
withdraw a maximum of $100,000 from their IRAs and pensions without
paying the 10% penalty on early withdrawals.
- The Act extends deadlines for filing tax
returns and making tax payments until February 28, 2006 for
affected individuals, and applies this extension to employment
taxes, in addition to income, estate and gift taxes.
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| (3) Archer medical savings account (MSA)
deductions are extended through 2005, and are reported on Line 36 of
Form 1040. (4) The maximum annual
dollar contribution limit for IRA contributions is $4,000 for 2005. The
same limit applies for 2006 and 2007.
(5) You may be able to claim the earned
income credit for 2005 if (1) a child lived with you and you earned less
than $31,030 ($33,030 if married filing jointly); (2) 2 or more children
lived with you and you earned less than $35,263 ($37,263 if married
filing jointly) or (3) a child did not live with you and you earned less
than $11,750 ($13,750 if married filing jointly).
(6) You may be able to take an IRA
deduction even if you were covered by a retirement plan and your 2005
modified AGI is less than $55,000 ($75,000 in married filing
jointly or qualifying widow or widower).
(7) The dollar limit on annual elective deferrals an individual
may make to a 403(b) annuity increased to $14,000 in 2005. This amount
increases to $15,000 in 2006, with indexing in $500 increments
thereafter.
(8) The limit on elective deferrals to a
403(b) annuity plan was increased by $4,000 in 2005 for individuals who
had attained age 50 by the end of the year.
(9) The personal exemption amount
increased to $3,200 for 2005.
(10) The standard mileage rate for business
miles was 40.5 cents per mile for business miles drive during the first
8 months of 2005, and 48.5 cents per mile for business miles driven
during the final 4 months of the year. The standard business mileage
rate for 2006 is 44.5 cents per mile.
(11) The IRS maintains that a minister's housing
allowance is "earned income" in determining eligibility for the earned
income credit--for ministers who have not opted out of Social Security
by timely filing Form 4361. For ministers who have opted out of Social
Security the law is less clear, and the IRS has not provided guidance.
(12) Recent tax cuts enacted by Congress will
result in lower taxes, and lower estimated tax payments, for many
taxpayers. Be sure your estimated tax calculations or withholdings take
into account the most recent tax law changes.
(13) Recent Tax Court rulings indicate that
there will be no relaxation in the strict substantiation requirements
that apply to the business use of cell phones.
(14) The Social Security "earnings tests" are
increased for 2006. The earnings tests prescribe the amount of income
that persons who elect to receive Social Security retirement benefits
prior to attaining "normal retirement age" may receive without a
reduction in benefits. The normal retirement age for persons born in
1941 is 65 years and 8 months. For persons attaining normal retirement
age after 2006 the earnings test amount in 2006 is $12,480, or $1,040
per month. Social Security benefits are reduced by $1 for every $2 of
earnings in excess of the exempt amount. For people attaining normal
retirement age in 2006 the earnings test amount is $2,770 per month.
Social Security benefits are reduced by $1 in benefits for every $3 of
earnings in excess of the exempt amount for months prior to the month
that normal retirement age is attained. Earnings in or after the month
you reach normal retirement age do not count toward the retirement test.
(15) The Working Families Tax Relief Act extends
the $1,000 child tax credit through 2010.
(16) The "standard deduction" (the amount you
can deduct if you cannot itemize your deductions) increased to $10,000
in 2005 for married couples filing jointly--up from $9,700 in 2004. This
is twice the amount of the standard deduction for single taxpayers
($5,000) for 2005. Single taxpayers who are 65 years of age or older, or
blind, get a $1,250 increase in their standard deduction for 2005.
Married taxpayers who are 65 years of age or older, or blind, get a
$1,000 increase in their standard deduction for 2005.
(17) Under the so-called "Deason Rule" (named
after a 1964 court case) ministers must reduce their business expense
deduction for unreimbursed expenses as well as expenses reimbursed under
a non-accountable arrangement by the percentage of their total church
income that consists of a tax-exempt housing allowance. The Tax Court
reaffirmed this rule in 2005.
(18) The IRS amended the "use it or lose it"
rule for flex plans. The amendment allows employers to amend their flex
plan for a "grace period" of 2 1/2 months. Expenses for qualified
benefits incurred during the grace period may be paid or reimbursed from
benefits or contributions remaining unused at the end of the preceding
year.
(19) The IRS has issued Form 1098-C, which must
be used by churches to report to the IRS donations of used vehicles
(cars, boats, planes) valued by the donor at more than $500. The same
form can be used to provide donors with a written acknowledgment of
their donation.
(20) New tax regulations issued by the Treasury
Department eliminate the requirement that employers send copies of
potentially questionable Forms W-4 (Employee's Withholding Allowance
Certificate) to the IRS.
(21) The IRS will be unveiling a new Form 944 in
2006 that will replace Form 941 (Employer's Quarterly Tax Return) for
eligible small employers. The purpose of the new Form 944 is to reduce
burden on the smallest employers by allowing them to file their
employment tax returns annually, and in most cases, pay the employment
tax due with their return.
(22) A blue-ribbon panel has made several
suggestions to Congress regarding the governance of public charities.
Many of the suggestions, if adopted, would impact churches.
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Minister & Church Questions & Answers
Below are several questions a minister should consider before preparing
his/her 2006 federal tax return and some Q & A about the minister and
his/her church. |
Q. Must ministers pay federal income taxes?
A. Yes. Ministers are not exempt from paying federal income taxes.
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Q. How much income must I earn to be
required to file a tax return?
A. Generally, ministers are required to file a federal income tax return
if they have earnings of $400 or more. Different rules apply to some
ministers who are exempt from self-employment taxes.
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Q. Can I use the simpler Forms 1040A or
1040-EZ rather than the standard Form 1040?
A. Most ministers must use the standard Form 1040.
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Q. What records should I keep?
A. You should keep all receipts, canceled checks and other evidence to
prove amounts you claim as deductions, exclusions or credits.
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Q. What is the deadline for filing my
federal income taxes?
A. April 16, 2007.
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Q. What if I am unable to file my tax return
by the deadline?
A. You can obtain an automatic four-month extension to file your 2005
Form 1040 by filing a Form 4868 by April 16, 2007. Your taxes still must
be paid on or before April 16. You can remit such taxes along with Form
4868.
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Q. Should I prepare my own taxes?
A. The answer depends on your ability and experience in working with
financial information and in preparing tax returns. Keep in mind:
Ministers' taxes reflect a number of unique rules, but these rules are
not complex. Many ministers will be able to prepare their own tax
returns if they understand the unique rules that apply. This is not
hard. On the other hand, if you experienced unusual events in 2006, such
as the sale of purchase of a home or the sale of other capital assets,
it may be prudent to obtain professional tax assistance. The IRS
provides a service called Taxpayer Assistance, but it is not liable in
any way if its agents provide you with incorrect answers to your
questions. Free taxpayer publications are available from the IRS and
many of these are helpful to ministers.
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Q. What constitutes a "church"
in the eyes of the Internal Revenue Service (IRS)?
A. The Internal Revenue Code does not specifically define the term
"church." However, because special tax rules apply to churches, it is
important to distinguish them from other religious organizations.
Certain characteristics are generally attributed to churches. These
attributes were developed by the IRS and by court decisions and include
the following:
- A
distinct
legal
existence;
- A
recognized
creed and
form of
worship;
- A
definite and
distinct
ecclesiastical
government;
- A formal
code of
doctrine and
discipline;
- A
distinct
religious
history;
- A
membership
not
associated
with any
other church
or
denomination;
- An
organization
of ordained
ministers;
- Ordained
ministers
selected
after
completing
prescribed
courses of
study or
examination
by doctrinal
questioning;
-
Established
places of
worship;
- A
literature
of its own;
- Regular
congregations;
- Sunday
schools for
the
religious
instruction
of the
young; and
- Schools
for the
preparation
of its
ministers
Although this
list is not
all-inclusive,
and all of the
attributes need
not be present
in every case,
these
characteristics,
together with
other facts and
circumstances,
are generally
used to
determine
whether an
organization
constitutes a
church for
federal tax
purposes.
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Q. Does a church have to apply to the IRS to obtain 501(c)(3)
tax-exempt status?
A. No. Section 508(c) of the Internal Revenue Code
specifically states that churches, their integrated auxiliaries and
conventions or associations of churches are not required to apply for
and obtain recognition of tax-exempt status from the IRS in order to be
treated as tax exempt, provided they meet the requirements of section
501(c)(3) of the Internal Revenue Code. In general, those requirements
are as follows: |
| 1. The organization must be a corporation or have a corporation-like association.
2. The church must have a written document that sets forth its organization.
3. The organization must be organized exclusively for exempt purposes.
4. The organization must be operated exclusively for exempt purposes.
5. None of the organization's net earnings may inure to the benefit of any private individual, and the organizational document must include a dissolution clause that requires that in the event of dissolution the assets will be distributed to other exempt organizations and not to individuals.
6. The organization may not engage, to a substantial degree, in attempts to influence legislation.
7. The organization may not participate in political campaigns.
8. The organization must not engage in illegal activity or activity contrary to public policy.
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Q. Why are some churches that
have filed for 501(c)(3) status with IRS Form 1023 now listed in IRS
publication 78?
A. While there is no governmental
requirement for churches to file with the IRS to obtain 501(c)(3)
status, some churches have elected to do so to meet the requirements for
participation in various secular activities or programs that require the
church to be listed in IRS Publication 78, the listing of all non-profit
organizations that have directly filed with the IRS and been officially
given tax-exempt status through the filing process. (Remember, churches
are exempt from having to file.) Churches wishing to participate in food
bank programs, corporate matching donations, foundation grants, etc.,
are examples of those that elect to file IRS Form 1023 to become
eligible for participation in these secular programs. |
Q. Is a Federal Employer
Identification Number (FEIN) necessary
for a church?
A. Yes. A FEIN (sometimes
erroneously referred to as a Federal Tax
Number) absolutely is required. IRS
Publication 1828 (Rev.7-2002) states
every tax-exempt organization, including
a church, is required to have a FEIN
whether or not it has any employees. It
is to be given to the bank when opening
church bank accounts and must be used on
any employer, employee or self-employed
person's tax forms (e.g., W-2,
1099 Misc, 941 Quarterly Employment Tax
Return, 990-T) that must be filed with
the IRS to account for pay and any tax
withholdings. Churches can obtain a FEIN
by submitting an IRS Form SS-4 to the
IRS. The FEIN number assigned will be a
nine-digit number in the following
format: 00-1234567.
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Q. Does a church have to file
an annual income tax return with the IRS?
A. No. Exempt churches, their integrated auxiliaries and
conventions or associations of churches are not required to file federal
income tax returns on church income, or, for that matter, the usual
information return filed by tax-exempt entities (Form 990, Return of
Organization Exempt From Income Tax). However, the church may have to
file Form 990-T, Exempt Organization Business Income Tax Return, if it
is generating gross income from an unrelated business of $1,000 or more.
Don't confuse income tax returns with the "employment" tax return(s)
that may be required for your church if you have employees.
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Q. Is a church subject to tax on any income from an activity that
is unrelated to its exempt purposes?
A. Yes. Churches, like other tax-exempt organizations, may
engage in income-producing activities unrelated to their tax-exempt
purposes. However, the net income from such activities may be subject to
unrelated business income tax (UBIT). If a church or other exempt
organization has gross receipts of $1,000 or more from the conduct of
any unrelated trade or business, it may be required to file IRS Form
990-T, Exempt Organization Business Income Tax Return. The Form 990-T is
due the 15th day of the fifth month following the end of the church's
tax year.
See IRS website for an additional explanation.
| Income from
an activity will
be subject to
UBIT if the
following three
conditions are
met:
1. The
activity
constitutes a
trade or
business.
2. The trade
or business is
regularly
carried on.
3. The trade
or business is
not
substantially
related to the
organization's
exempt purpose.
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Q. Are churches liable for withholding and payment to the
government of payroll taxes?
A. Yes. While churches in general are exempt from federal
income tax on their income, they are not exempt from the requirement to
withhold (and submit to the government) payroll taxes for their
employees, as well as to pay the employer's share of Social Security and
Medicare taxes. Substantial penalties may be imposed against an
organization that fails to withhold and pay the proper employment tax.
For example, in April 2001, one church ran up a tax debt of $6 million
for its 16-year refusal to withhold employee income taxes and to pay the
employer's share of Social Security taxes. Upon court order, United
States marshals seized the entire church property, including the
parsonage, as payment of the back taxes and penalties.
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Q. When are churches not liable for Social Security and Medicare
taxes?
A. Wages paid to non-ministerial (lay) church employees
are subject to Social Security and Medicare taxes unless one of the
following applies:
- The
church pays
the employee
wages of
less than
$100 in a
calendar
year.
- A
church, its
integrated
auxiliaries
or a
convention
or
association
of churches
that is
opposed to
the payment
of Social
Security and
Medicare
taxes for
religious
reasons can
file IRS
Form 8274,
Certification
by Church
and
Qualified
Church
Controlled
Organizations
Electing
Exemption
From
Employer
Social
Security and
Medicare
Taxes, to
elect
exemption
from Social
Security and
Medicare
taxes. The
IRS Form
8274 must be
filed within
the first
quarter
after hiring
your first
employee who
is not a
minister.
This
election
does not
relieve the
organization
of its
requirement
to withhold
income tax
on wages
paid to its
lay
employees.
Further, if
such
election is
made, the
(lay)
employees of
the church
who are
exempt from
Social
Security and
Medicare tax
withholding
and
matching,
must pay 100
percent of
the
self-employment
tax
themselves
in quarterly
payments to
the IRS by
filing IRS
Form 1040-ES
each
quarter.
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Q. What does the IRS look for to determine
whether or not an organization is "tax-exempt"?
A. To be tax-exempt under section 501(c)(3) of the
Internal Revenue Code, an organization must be
organized and operated exclusively for purposes
set forth in section 501(c)(3), and none of its
earnings may inure to any private shareholder or
individual. In addition, it may not attempt to
influence legislation as a substantial part of
its activities and it may not participate in any
campaign activity for or against political
candidates.
Click here for a full discourse regarding a
church being "tax-exempt".
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Recommendation.
If you need professional assistance, here are some tips that may help
you find a competent tax professional: |
- Ask other ministers in your community for
their recommendations.
- If possible, use a CPA who specializes in
tax law and who is familiar with the rules that apply to ministers.
A CPA that has completed a rigorous educational program and is
subject to strict ethical requirements.
- Ask local tax professionals if they work
with ministers and, if so, with how many.
- Ask local tax professionals a few questions
to test their familiarity with ministers' tax issues. For example,
ask whether ministers are employees or self-employed for Social
Security purposes. Anyone familiar with ministers' taxes will know
that ministers always are self-employed for Social Security purposes
with respect to their ministerial duties. Or, ask a tax professional
if a minister's church salary is subject to income tax withholding.
The correct answer is no, and anyone familiar with ministers' taxes
should be able to correctly answer this question.
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| DAF Associates, Inc.
has many years experience with ministers tax return preparation and is
familiar with the special rules associated with members of the clergy.
Contact us by filling out the information sheet on our Contact Page, and
we'll respond just as quickly as possible. Simply click here -->
Contact <-- and you
will be directed to our Contact Page. (or click on "Contact" on the bottom
panel of this page). |
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