Taxation IRS - Sequence       8503-01 ZZmis

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                   TO: Interested Mission Agency                                                                     FROM: Jim Bramer, Retired CPA-Auditor 
                                                                                                                                                  FILE: 8503-01/mis

                    RE: Taxation - IRS - Sequence                                                                     ORIGINATED:  December 1994


          A Tax Exempt Ministry has financial polices whereby a Staffer ..... a missionary, for example ..... 'raises' their own financial support. This usually means that the Staffer has only such money raised (we will call it a "Pool") to meet all of the expenses related to their specific portion of the Ministry's endeavor. Questions arise as to the Staffer's personal tax consequences of the afore-mentioned pool.
        First, let's assume that during the entire year xxx1 the Pool attributed to Joe was $ 15,000 ..... and the Pool attributed to Alice was $ 25,000. Further, let's assume that Alice is a tax qualified Clergy-person entitled to $12,000 annual housing allowance for tax purposes, but Joe is not entitled to such an allowance.    And Staffers incur certain authorized Ministry expenses, as reflected by the Ministry's Expense Reimbursement (MER) finance methods and procedure. For tax purposes the Pool usage application sequence is 1> MER 2> Housing allowance, and 3> residual, or Stipend. The following examples bear this out.

EXAMPLE ONE for ALICE:

                                                    Balance

          Pool                                  $ 25,000
          House Allw   12, 000        13,000
          MER                  5,000           8,000

     Alice's taxable Stipend for the year xxx1 is $ 8,000

EXAMPLE TWO for ALICE:

                                                     Balance

              Pool                                    $ 25,000
              House Allws    12,000        13,000
              MER                   13,000          None

            Alice does not have any taxable Stipend for the year xxx1

EXAMPLE THREE for JOE:

                                                        Balance

                         Pool                           $ 15,000
                         MER           13,500 $      1,500

                        Joe's taxable Stipend for the year xxx1 is $ 1,500

           The following interchange recently involving a Missionary Organization client's Chief Financial Officer (CFO) and their Certified Public Accountant (Not JRB) might also be helpful:

TO: JRB FR: CPA, who also a Retired IRS Agent

      I placed a call to *****'s CFO just to get a clear idea of what they are dealing with. I have responded to his questions...this is my understanding. 

                            Item 1. Ministry expenses
                            Item 2. Housing allowance
                            Item 3. Clergy stipend.

        All, however, are subject to availability of funds. Item 1. is not taxable income to recipient. Item 2. has the tax preference of not being subject to income tax (might be subject to elected Self Employment tax) Item 3. income has no special tax advantage - just regular taxable income. When a clergyman is paid a sum for the year that is not as great as the board approved totals of 1. 2. & 3, then a decision must be made as to how to characterize the income. IRS. would look at facts and circumstances in an attempt to characterize as much of the income as possible to category 3. I feel that it is permissible to first allocate to item 1. then to 2. then to 3. By doing so, you place the clergymen in the best possible tax position.
        To make this clearer to follow, I would suggest a policy that requires all clergy to submit an expense report prior to payday so that the sums paid to the clergyman might be issued in two separate checks. The first would be totally ministry expense reimbursement and be supported by proper documentation (i.e., receipts, canceled checks etc.). The other check would be for any residual amount, first allocated to housing allowance, then to clergy stipend depending the availability of funds. The clergyman would be paid differing amounts each payday, but this is probably taking place now anyway. In the event the ministry was audited, I believe this approach would be acceptable. As things stand now, It is likely that all payments to a clergyman are totaled for the year and then allocated at year end. This approach leaves the Ministry open to the possibility of disputes over the nature of the payments in the event of an audit. I believe the approach above is a better choice.
        Once you have decided on the allocation policy, it is easy to determine how the sums should be reported on form W-2.

=====================================================================================================

FR: Named Ministry's CFO                                                                                             TO: both CPA and JRB

            For the record, Named Ministry DOES separate out the ministry expense reimbursement  (MER) checks from the regular stipend/allotment checks in above sequential manner.  All ministry expenses are well-documented, and we scan the requests closely before approving the payment. We use a variation of the Ministry Expense Reimbursement (MER) program used by XYZ (a well known large Mission), and are pleased with the results.
             Warm regards, and thank you both for the assistance.

Please let me know if you have questions.


      Please Click Here for a list having to do with Mission Agencies topics here on www.bcidot.org. This publication originated in December 1994 and was UPTD: April 20, 2010

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