Editor's Note:Frank and Elaine Sommerville, editorial advisors for ManagingYourChurch.com, presented some of this material on Monday at The Ultimate Financial and Legal Conference in Arlington, Texas.
I. Thou shalt not allow the church's intellectual property to be used for personal purposes.
Rule: Under the work for hire doctrine, any property developed within the scope of the job duties of an employee is the property of the employer.
Practice Tip: An intellectual property policy should be carefully crafted and adopted. It should address all areas of concern, such as curriculum, sermons, and music.
II. Thou shalt not have a substantial amount of revenue derived from unrelated business income.
Rule: An organization may have some unrelated business income, but too much can endanger the exempt status of the church.
Unrelated business income is generated from activities that are:
1. Regularly carried on.
2. Not substantially related to exempt purposes.
3. Trade or business.
Practice Tip: The rules are complicated and there is an exception to every exception. Each activity must be separately analyzed. The commercial manner in which an activity is conducted can create unrelated business income even if the activity seems to be related.
III. Thou shalt carefully design outreach programs to provide for the benefit of a charitable class.
Rule: The church's programs cannot create unacceptable private benefit to individuals and organizations. Therefore, all programs have to be able to pass a test that any benefit to an individual is permissible private benefit and will not endanger the exempt purposes of the church. Such programs include the benevolence program and scholarship programs.
Practice Tip: The church should construct policies and guidelines to be followed for these programs that comply with the applicable rules.
IV. Thou shalt not allow any transactions with another party to be conducted at more than or less than fair market value.
Rule: Any transaction may benefit the church, but the transaction may not provide a greater benefit to the other party (with the exception of another nonprofit organization). Transactions with disqualified persons may be subject to intermediate sanctions of 25 percent to 200 percent under IRC Section 4958.
Practice Tip: Fair market value should always be established for a transaction. Where a control party is involved, this should be determined and documented in writing. For example, competitive bids should be obtained for transactions involving outside services, purchases, or sales.
V. Thou shalt not endorse any candidate for any public office, nor dedicate a substantial amount of your assets to legislative activities.
Rule: No support or opposition may be given to a political candidate and only limited support can be dedicated to legislative activities.
VI. Thou shalt fully document every aspect of a control party's (disqualified person's) compensation package within the requirements of IRC Section 4958.
Rule: The compensation paid to a disqualified person must meet the following criteria:
1. It must be decided by the independent persons.
2. It must be based on outside, comparable data.
3. It must be documented in writing along with the basis for the amount of compensation determined.
Practice Tip: Each year, analyze every benefit provided to a disqualified person and re-document these in writing prior to the start of the next year. This includes cash compensation, noncash compensation, and fringe benefits.
VII. Thou shalt document all expenditures as to the exempt purpose of the expenditure and maintain documentation as required by law for those special expenses involving meals, entertainment, and travel.
Rule: Every expenditure of a church must be documented as to the exempt purpose of the expense. For meals, entertainment, and travel, the "who, what, when, where, and why" must be documented.
Practice Tip: The following should be adopted and maintained by the church:
1. An accountable plan for all business expenses.
2. A credit card acceptance policy that requires employees to submit receipts for all charges.
3. A formal policy should be adopted to require immediate repayment of any expense that is determined to be a personal expense.
VIII. Thou shalt conduct all designated fundraising programs with the greatest of care and caution and don't mess up the contribution receipts.
Rule: Designated contributions must be used as designated unless the restriction is released by the donor or by the appropriate state office or court.
1. Attempt to build in a provision that allows excess funds to be redirected to another ministry of the church or to the general fund.
2. Make sure everyone is familiar with the rules regarding events that include a contribution where benefits may be exchanged.
IX. Thou shalt adhere to all payroll/labor rules—even the ones you don't like.
Rule: Churches are subject to many of the same payroll tax rules as other organizations, with the complication of special rules for ministers. Additionally, the majority of labor law rules apply to churches and religious ministries.
Practice Tip: Pay special attention to the following areas:
1. Classification of ministers.
2. Classification of employees vs. independent contractors.
3. Deposit rules for payroll taxes and filing requirements for Forms 941, 944, W-2, and 1099-Misc.
4. Taxation of fringe benefits.
5. Designation of housing allowance.
X. Thou shalt endeavor to determine good governance procedures and adhere to them consistently.
Rule: Good governance equals good organization. Follow the basics:
1. Knowledge of what the organization's exempt purposes are.
2. Good governing documents.
3. Well-documented actions of the governing body(ies).
4. Good policies.
5. Good people.
6. Keep the corporate status up to date and in good standing.
Practice Tip: Review governing documents, policies, and procedures and make sure that they are actually being followed.
Adapted from "The Ten Commandments of Religious Organizations," by Frank and Elaine Sommerville. Used with permission.
For more help, check out the annualChurch & Clergy Tax Guide, the 2012-2013 Compensation Handbook for Church Staff, the Essential GuideeBook series for church boards, and the Does Your Church Owe Taxes on Alternative Revenue? Feature Report from Church Law & Tax Report.
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Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.