The Zondervan Church and Nonprofit Oranization Tax & Financial Guide 2002

by Busby, Dan

• ISBN13: 9780310237549
• ISBN10: 0310237548
• Format: Paperback
• Copyright: 2001-11-01
• Publisher: Zondervan

Table of Contents

Special Index for Church Treasurers	v
Introduction	viii
Recent Developments	1	(190)
Financial Accountability	11	(16)
Accountability to an independent board	12	(6)
Accountability to donors	18	(9)
Tax Exemption	27	(24)
Tax exemption for churches	28	(1)
Advantages and limitations of tax exemption	29	(1)
Starting a nonprofit organization	30	(4)
Unrelated business income	34	(7)
Private benefit and private inurement	41	(2)
Filing federal returns	43	(3)
Postal regulations	46	(1)
State taxes and fees	46	(3)
Political activity	49	(2)
Compensation Planning	51	(20)
Reasonable compensation	51	(1)
Housing and the housing allowance	52	(3)
Deferred compensation	55	(3)
Maximizing fringe benefits	58	(9)
Nondiscrimination rules	67	(1)
Paying employee expenses	67	(4)
Employer Reporting	71	(22)
The classification of workers	71	(5)
Reporting compensation	76	(1)
Payroll tax withholding	76	(4)
Depositing withheld payroll taxes	80	(1)
Filing the quarterly payroll tax forms	81	(3)
Filing the annual payroll tax forms	84	(8)
Refunds and abatements	92	(1)
Information Reporting	93	(10)
General filing requirements	93	(2)
Reporting on the receipt of funds	95	(1)
Reporting on the payment of funds	96	(5)
Summary of payment reporting requirements	101	(2)
Your Financial Records	103	(36)
The money comes in	103	(7)
The money goes out	110	(3)
Accounting records	113	(5)
Financial reports	118	(10)
Budgeting	128	(1)
Audit guidelines	128	(7)
Church internal audit guidelines	135	(4)
Charitable Gifts	139	(34)
Percentage limitations	140	(1)
Charitable gift options	141	(2)
Charitable gift timing	143	(1)
Charitable contribution acknowledgments	144	(6)
Gifts that may not qualify as contributions	150	(2)
Reporting to the IRS	152	(4)
Quid pro quo disclosure requirements	156	(6)
Special charitable contribution issues	162	(11)
Risk Management	173	(18)
The risk management process	173	(1)
Steps to avoid sexual abuse	174	(3)
Insuring for risks	177	(7)
Complying with applicable laws	184	(7)
Citations	191	(5)
Index	196	(4)
10 Biggest Tax Mistakes Made by Churches and Nonprofit Organizations	200

Excerpts

Financial

Accountability

We need to practice what we

preach about accountability.

In This Chapter

* Accountability to an independent board * Accountability to donors

The public has high expectations of religious organizations. Day after day, thousands in the nonprofit community work tirelessly and selflessly to address physical and spiritual needs worldwide, only to find the public casting a wary eye on them due to the highly publicized misdeeds of a few. Donors recognize that enormous needs exist and they want to respond generously to those needs. But they also want to be sure that optimum use of their sacrificial gifts is employed by the charities they support. There is no acceptable alternative to accountability.

For large nonprofit organizations, accountability issues often relate to complex issues of private inurement or conflicts of interest. In other organizations, the issues may be as basic as whether to accept a gift that appears to be a pass-through contribution for the personal benefit of a designated individual.

Financial accountability is based on the principle of stewardship. A steward-manager exercises responsible care over entrusted funds. Good stewardship rarely occurs outside a system of accountability.

Financial accountability is the natural outgrowth of proper organizational leadership. Providing clear, basic explanations of financial activity starts with the detail record of transactions and evolves to the adequate reporting to donors and boards.

U.S. laws provide special tax treatment of religious and charitable institutions. The nonprofit organization that refuses to disclose its finances is shortchanging the public from which it derives its support. It also causes suspicions about how it is using the financial resources at its disposal.

Being a member of organizations that promote stewardship principles often enhances accountability. Several organizations provide leadership in the area of financial accountability for Christian organizations. The Evangelical Council for Financial Accountability (ECFA), with over 1,000 members, has established standards relating to proper accounting, an independent and responsible volunteer board of directors, full disclosure of finances, and fair treatment for donors.

For missionary organizations, the Interdenominational Foreign Mission Association (IFMA) and the Evangelical Fellowship of Mission Agencies (EFMA) are groups which provide accountability for members.

Accountability to an Independent Board

Board governance

The importance of an active, informed board cannot be overemphasized. Even minor board neglect, left unchecked, can eventually intrude upon the accountability and effectiveness of the ministry. In contrast, the active informed board will hold to the mission, protect the integrity of ministry objectives, and ensure that consistent adherence to board policies is practiced.

Strong leadership often shuns accountability. Some boards do not live up to their responsibility to hold themselves accountable and to demand accountability of the organizational leadership.

Can your organization's leadership be challenged and voted down? Are the board members permissive and passive or involved and active? Are your values and policies clearly articulated? Are they operative in the organization daily? Are annual evaluations, based on predetermined goals, made of the pastor(s) or the nonprofit chief executive officer (CEO)?

A board should generally meet at least semi-annually. Some boards meet monthly. Meetings should be more than listening to the CEO's report and rubberstamping a series of resolutions prepared by the CEO.

ECFA members must have a board of not less than five individuals. A majority of the board must be other than employees or staff, or those related by blood or marriage, to meet ECFA standards.

Even when employee membership on the board is slightly less than a majority, the independence of the board may be jeopardized. Employees often lack independence and objectivity in dealing with many board-level matters. While the CEO is often a member of an organization's board of directors, department heads are generally not members of the board.

Recording board actions

The actions of an organization's board and its committees should be recorded by written minutes, including the signature of the group's secretary, prepared within a few days after the meeting concludes. The minute books of some charities are almost nonexistent. Minutes of the most recent board meeting often appear to be placed in proper written form on the eve of the succeeding board meeting. Such lack of organization can be indicative of weak board governance and may leave a poor paper trail to document the board's actions.

The actions of an organization's board typically include the approval and revision of policies that should be organized and printed as the body of board policies. These policies, extracted from the board minutes, should be revised after each board meeting if new policies are adopted or previously existing policies are revised.

Financial reporting

ECFA members must have an independent annual audit according to generally accepted auditing standards (GAAS). Financial statements must be prepared following generally accepted accounting principles (GAAP).

Here is what to look for from your audit firm:

  A firm thoroughly knowledgeable about current accounting standards and

one that understands your segment of Christian nonprofits.

  A firm that routinely prepares value-added management letters for their

audit clients.

  A firm that helps you reduce your audit fee.

  A firm that understands your accounting system.

When an organization has an external audit, the board or a committee consisting of a majority of independent members should review the annual audit and maintain direct communication between the board and the independent certified public accountants.

The board should also receive staff-prepared monthly or quarterly financial statements.

Compensation review

An annual review of the local church minister's or nonprofit organization executive's compensation package is vital. The review should focus on all elements of pay, taxable and nontaxable, in addition to reviewing performance and establishing performance objectives and criteria.

Pay and fringe benefit packages should be determined by an objective evaluation of responsibilities, goals reached, and available resources. A comparison with positions in other organizations may be helpful. National salary surveys may provide meaningful data such as National Association of Church Business Administrators Church Staff Compensation Survey (www.nacba.net) and Christian Management Association Salary Survey (www.CMAonline.org).

The approved compensation package should be documented in board and/or subcommittee minutes. This action should include guidelines for disbursement of compensation-related funds by the organization's treasurer.

With increased scrutiny on nonprofit salaries (see chapter 3), it is important that compensation amounts be accurately stated. Gross pay may include the following elements (some taxable and some tax-free or tax-deferred):

  Cash salary

  Fair rental value of a house, including utilities, provided by the organization

  Cash housing or furnishings allowance

  Tax-deferred payments

  Value of the personal use of organization-owned aircraft or vehicle

  Value of noncash goods and services

  Cash bonuses

Budget process

The organization should prepare a detailed annual budget consistent with the major classifications in the financial statements and approved by the board. The budget should allow meaningful comparison with the previous year's financial statements; recast if necessary.

Responsibility for budgetary performance should be clearly assigned to management as appropriate (for example, department heads, field directors, and so on). The controller or treasurer of an organization is normally responsible for budgetary enforcement and reporting. For more information on the budgeting process, see pages 126-31.

Conflicts of interest related party transactions

Conducting activities

Fairness in decision-making is more likely to occur in an impartial environment. Conflicts of interest and related-party transactions are often confused. However, the distinction between the two concepts is useful.

The potential for a conflict of interest arises in situations in which a person has a responsibility to promote one interest, but has a competing interest at the same time. If the competing interest is exercised over a fiduciary interest, the conflict is realized. Conflicts of interest should be avoided.

Related-party transactions are transactions that occur between two or more parties that have interlinking relationships. These transactions should be disclosed to the governing board. Transactions should be evaluated to ensure they are made on a sound economic basis. Some related-party transactions are clearly to the advantage of the organization and should be pursued. Other related-party transactions are conflicts of interest and should be avoided.

Under ECFA guidelines, transactions with related parties may be undertaken only in the following situations:

  The audited financial statements of the organization fully disclose material

related-party transactions.

  Related parties are excluded from the discussion and approval of related-party

transactions.

  Competitive bids or comparable valuations exist.

  The organization's board approves the transaction as being in the best

interest of the organization.

Example 1: An organization purchases insurance coverage through a firm

owned by a board member. This would constitute a conflict of interest

unless the cost of the insurance is disclosed, the purchase is subject to

proper approvals, the price is below the competition, and the purchase is

in the best interests of the organization. If the purchase passes these

tests, it does not constitute a conflict of interest but is still a related-party

transaction.

Example 2: The CEO and several employees are members of the board.

When the resolution on salary and fringe-benefit adjustments comes to

the board, should those affected by the resolution discuss and vote on the

matter? No. Not only should the CEO and employees avoid discussing

and voting on such matters, to avoid the very appearance of a conflict of

interest, the employees should absent themselves from the meeting.

Example 3: A nonprofit board considers a significant loan to a company

in which a board member has a material ownership interest. Should this

loan even be considered? Only if it is in the best interest of the nonprofit

organization, allowable under its bylaws, and allowed under state laws.

Example 4: A church receives a significant endowment gift. The church

board establishes investment policy guidelines and appoints a subcommittee

of the board to carry out the routine investing of the funds.

The Investment Committee is chaired by an investment broker who

sells mutual funds for which his firm receives commissions. He receives

commissions on the sales from his firm. The broker recommends that

the purchases of certain mutual funds be made from his firm.

This is a blatant conflict of interest even if the broker fully discloses the

fees that would be paid to his firm and commissions that, in turn, would be

paid to him and even if the fees are comparable to what other brokers

would charge. This biased environment makes it nearly impossible to

achieve fairness in decision-making.

Selecting board members

Information concerning prospective and current board members may reveal potential conflicts that will disqualify the individual. If a conflict is sufficiently limited, the director may simply need to abstain from voting on certain issues. If the conflict of interest is material, the election or re-election of the individual may be inappropriate.

Honoraria

When a board member or an employee of an organization speaks at a function related to the organization or speaks on behalf of the organization and receives an honorarium, a related party transaction has occurred. While the facts and circumstances may assist in determining whether a conflict of interest has occurred, it is often helpful for the organization to adopt a policy regarding the ownership of honoraria received in these situations.

Board compensation

Most nonprofit board members serve without compensation. This practice reinforces an important distinction of nonprofits: the assets of a nonprofit should not be used for the private enrichment of directors, members, or employees. If members are paid for their service on the board, the amount must be reasonable.

Board members often have travel-related expenses reimbursed. Mileage may be reimbursed up to the standard IRS business rate (34.5 cents per mile for 2001) without reporting any taxable income to the board member. Travel expenses reimbursed for the spouse of a board member represent taxable income to the board member unless the spouse qualifies for employee treatment and provides services to the nonprofit in conjunction with the trip.

Accountability to Donors

Donors are showing greater concern about the solicitation and use of their contributions. The primary areas of concern are:

Donor communication

ECFA requires that all statements made by an organization in its fund-raising appeals about the use of a gift must be honored by the organization. The donor's intent may be shaped by both the organization's communication of the appeal and by any donor instructions with the gift.

If a donor responds to a specific appeal, the assumption may be made that the donor's intent is that the funds be used as outlined in the appeal. There is a need for clear communication in the appeal to insure that the donor understands precisely how the funds will be used. Any note or correspondence accompanying the gift or conversations between the donor and donee representatives may indicate donor intent.

Continue...

Excerpted from The Zondervan Church and Nonprofit Organization Tax & Financial Guide 2002 Edition by Dan Busby Copyright © 2001 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.