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There were several important tax developments in 2020 that affect tax reporting by ministers, church staff, and churches for the upcoming tax-filing season as well as reporting and records-keeping requirements in 2021 and beyond. The top ten developments are explained in this article as well as in the 2021 Church & Clergy Tax Guide, which also covers 61 other key developments.
#1: Coronavirus Aid, Relief, and Economic Security (CARES) Act
The 900-page $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act became law on March 27, 2020. The CARES Act is the third coronavirus response package enacted by Congress. It follows:
- The CARES Act (March 6, 2020) provided $8.3 billion in emergency funding for federal agencies to respond to the coronavirus outbreak.
- The Families First Coronavirus Response Act (March 18, 2020) requires certain employers to provide their employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19. These provisions apply from the effective date through December 31, 2020.
Key point. Congress is considering additional relief packages.
Many of the provisions in the original CARES Act have expired. Those with relevance to churches and church staff in 2020 and future years are summarized below.
Rebates (“stimulus payments”)
All US residents with adjusted gross income up to $75,000 ($150,000 married), who are not a dependent of another taxpayer and have a work-eligible Social Security number, were eligible for the full $1,200 credit. The rebate is treated like other refundable tax credits, such as the child tax credit and earned income tax credit, and is not considered taxable income.
Waiver of 10-percent penalty on early withdrawals from qualified retirement accounts
The CARES Act waives the 10-percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made on or after January 1, 2020. In addition, income attributable to such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions.
Personal loans from qualified retirement plans
The CARES Act increased the amount available for personal loans from a qualified retirement plan from $50,000 to $100,000 for loans made between March 27 and September 22, 2020.
Required minimum distributions
The Act waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020. This provision provides relief to individuals who would otherwise be required to withdraw funds from such retirement accounts during the economic slowdown due to COVID-19.
Charitable contributions enhancements in 2020
The Act encouraged Americans to contribute to churches and charitable organizations in 2020 by permitting them to deduct up to $300 of cash contributions, whether or not they itemize their deductions.
The Act also increased the limitations on deductions for charitable contributions by individuals who itemize, as well as corporations. For individuals, the 50 percent of adjusted gross income limitation was suspended for 2020. For corporations, the 10 percent limitation was increased to 25 percent of taxable income.
Payroll taxes
The Act provides a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shutdown order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.
The credit is based on qualified wages paid to the employee. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shutdown order. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.
The Act allows employers and self-employed individuals to defer payment of the employer’s share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. Employers generally are responsible for paying a 6.2 percent Social Security tax on employee wages. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021, and the other half by December 31, 2022.
Key point. Deferral is not available to employers receiving assistance through the Paycheck Protection Program of the CARES Act.
#2: The SECURE Act’s six relevant provisions
The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) incentivizes taxpayers to save for retirement. Here are six provisions of greatest relevance to churches and church staff:
- increases to 72 the age after which required minimum distributions from certain retirement accounts must begin;
- repeals the prohibition on contributions to a traditional Individual Retirement Account (IRA) by an individual who has reached age 70½;
- allows penalty-free distributions from qualified retirement plans and IRAs for births and adoptions;
- specifies those individuals who may be covered by pension plans maintained by church-controlled organizations;
- expands “529 education” savings accounts to cover costs associated with registered apprenticeships, student loan repayments, and certain costs associated with elementary and secondary education; and
- increases the penalty for failure to file to the lesser of $435 or 100 percent of the amount of the tax due.
Tip. Read my full review for details of each provision.
#3: Tax Court approves charitable contribution deduction with only “substantial compliance”
Background
A married couple donated 150 acres of property to a charity, claiming a deduction of $1.5 million. Their tax return for the year of the contribution included an Internal Revenue Service (IRS) Form 8283 (qualified appraisal summary) as required by the tax code and regulations. The IRS audited the taxpayers’ return and disallowed the contribution deduction based on the taxpayers’ failure to properly substantiate their contributions because the appraisals attached to their Form 8283 did not identify the dates (or expected dates) of the contributions and did not contain statements that the appraisals were prepared for income tax purposes as required by the tax code and regulations for a qualified appraisal.
Tax Court rules that the taxpayers were entitled to deduction
The US Tax Court ruled that the taxpayers were entitled to a charitable contribution deduction based on their substantial compliance with the law:
Strict compliance will necessarily satisfy the elements of a qualified appraisal. However, the taxpayer who does not strictly comply may nevertheless satisfy the elements if he has substantially complied with the requirements. That is, the . . . requirements are “directory” (i.e., “helpful to [the government] respondent in the processing and auditing of returns on which charitable deductions are claimed”) rather than “mandatory” (i.e., literal compliance is required); and “the fact that a code provision conditions the entitlement of a tax benefit upon compliance with [the government’s] regulation does not mean that literal as opposed to substantial compliance is mandated. . . .” The [taxpayers] acknowledge that they did not strictly comply with the requirements—since neither of their appraisals stated the date of contribution or stated that it was prepared for income tax purposes—but they argue that they substantially complied with the qualified appraisal requirements. Because this is not a case where the taxpayers “furnished practically none of the information required,” the substantial compliance doctrine can apply. . . .
We hold that the [taxpayers] provided sufficient information to permit the IRS to evaluate the reported contributions and to investigate and address concerns about overvaluation and other aspects of the reported charitable contributions. The IRS did perform that investigation without any impediment arising from the two alleged defects in the appraisals. . . . Thus [they] have substantially complied with the regulations for qualified appraisals. Emanouil v. Comm’r, T.C. Memo. 2020-120 (2020).
Note: For an example in which “substantial compliance” was not met, see this Legal Development.
#4: A federal district court dismissed a lawsuit by a retired minister who claimed his church negligently failed to withhold FICA taxes
Background
A Seventh-day Adventist minister (the “plaintiff”) was employed for several years as a minister of the Greater New York Conference of the Seventh-day Adventist Church (GNYC). During his tenure at GNYC, it classified him as an employee, issuing him an “employee identification card” and W-2 forms, but not withholding Federal Insurance Contributions Act (FICA) contributions on his behalf.
In 2017, the plaintiff retired and the Social Security Administration informed him that he was not eligible for benefits because his employer failed to withhold FICA taxes. He was also ineligible for Medicare benefits.
The plaintiff claims his church was guilty of negligence
In 2019, the plaintiff sued GNYC and three of its officers in a federal district court in New York claiming that they were guilty of negligence for failing to withhold FICA taxes from his compensation for the 20 years of his employment. A federal district court dismissed the lawsuit, noting: “Because FICA exempts GNYC from withholding contributions on behalf of a person employed as a pastor, dismissal . . . is warranted here.”
The court acknowledged that employers are required to pay one-half of the FICA taxes (7.65 percent) of its employees, but stressed that the tax code “excludes from its definition of employment ‘service performed by a . . . minister of a church in the exercise of his ministry.’” However, the court noted that “employees not covered by FICA are required, under the Self-Employment Contributions Act (“SECA”), to pay taxes for Social Security and Medicare [a tax of 15.3 percent times net earnings from self-employment].”
The plaintiff was solely responsible for self-employment taxes
To summarize:
- Ministers’ wages from the exercise of ministry are exempt from income tax withholding; (2)
- ministers pay taxes using the quarterly estimated tax procedure;
- ministers’ wages from the exercise of ministry are exempt from FICA taxes;
- ministers pay self-employment taxes on their net earnings from the exercise of ministry.
- The alternative minimum tax (ATM) exemption amount for tax year 2020 increases to $72,900 for single taxpayers and $113,400 for married persons filing jointly. The exemption amount for single persons (and heads of household and married persons filing separately) begins to phase out at $518,400, and the exemption amount for married couples filing jointly begins to phase out at $1,036,800.
- For estates of any decedent passing away in calendar year 2020, the basic exclusion amount is $11,580,000.
- For 2020, the foreign earned income exclusion will be $107,600.
- The maximum earned income credit amount will be $6,660 for taxpayers with three or more qualifying children for 2020.
Therefore, the GNYC was not required to pay the employer’s share of FICA taxes on the plaintiff’s income. The plaintiff was solely responsible to pay self-employment (Social Security) taxes on his ministerial income. Kuma v. Greater N.Y. Conf. of Seventh-Day Adventist Church, 2020 U.S. Dist. LEXIS 156665 (S.D.N.Y. 2020).
Tip. For more on this topic, see the “Social Security” section in Pastor, Church & Law.
#5: Revoking an exemption from Social Security unlikely
Will Congress give ministers another opportunity to revoke an exemption from Social Security? It does not seem likely, at least for now. No bills were introduced in Congress in 2020 that would have authorized ministers to revoke an exemption from Social Security.
Tip. Learn more about this exemption and why few ministers qualify for it.
#6: Inflation adjustments for 2020
Some tax benefits were adjusted for inflation for 2020, but many remained unchanged due to the low rate of inflation. Key changes affecting 2020 returns include:
#7: Working after retirement
Many churches employ retired persons who receive Social Security benefits. Persons younger than full retirement age may have their Social Security retirement benefits cut if they earn more than a specified amount.
Full retirement age (the age at which you are entitled to full retirement benefits) for persons born in 1943–1954 is 66 years. If you are under full retirement age for the entire year, $1 is deducted from your benefit payments for every $2 you earn above the annual limit. For 2020 that limit is $18,240. In the year you reach full retirement age, your monthly benefit payments are reduced by $1 for every $3 you earn above a different limit. For 2020 that limit is $48,600, but only earnings before the month you reach full retirement age are counted.
Key point. Amounts are adjusted annually for inflation and in 2021 are $18,960 and $50,520.
#8: Supreme Court affirms religious exemptions from the ACA’s “contraceptive mandate”
Background
The Patient Protection and Affordable Care Act of 2010 (ACA) requires covered employers to provide women with “preventive care and screenings” without “any cost sharing requirements,” and relies on Preventive Care Guidelines (Guidelines) “supported by the Health Resources and Services Administration” (HRSA) to determine what is included in “preventive care and screenings.”
The Guidelines mandate that health plans provide coverage for all Food and Drug Administration approved contraceptive methods. When the US Departments of Health and Human Services, Labor, and the Treasury (the “Departments”) incorporated the Guidelines, they also gave HRSA the discretion to exempt religious employers, such as churches, from providing contraceptive coverage.
Later, the Departments also promulgated a rule accommodating qualifying religious organizations (other than churches) that allowed them to opt out of coverage by self-certifying that they met certain criteria to their health insurance issuer, which would then exclude contraceptive coverage from the employer’s plan and provide participants with separate payments for contraceptive services without imposing any cost-sharing requirements.
Self-certification accommodation challenged
Several religious organizations, including Little Sisters of the Poor, challenged the self-certification accommodation, claiming that completing the certification form would force them to violate their religious beliefs by “taking actions that directly cause others to provide contraception or appear to participate in the Departments’ delivery scheme.” As a result, they alleged that the self-certification accommodation violated the federal Religious Freedom Restoration Act (RFRA).
Under RFRA, a law that substantially burdens the exercise of religion must serve “a compelling governmental interest” and be “the least restrictive means of furthering that compelling governmental interest.” A federal appeals court disagreed that the self-certification accommodation substantially burdened the Little Sisters’ free exercise of religion rights and thus rejected this argument.
Supreme Court affirms the Departments’ legal authority
On appeal, the United States Supreme Court ruled in 2020 that the Departments had the legal authority to promulgate the exemptions from the so-called contraceptive mandate for churches and non-church religious organizations (such as the Little Sisters of the Poor). Little Sisters of the Poor v. Pennsylvania, 591 U.S. _____ (2020).
#9: IRS updates group exemption procedure
Background
Each year, tens of thousands of organizations file individual applications with the IRS for recognition of tax-exempt status. But for more than 70 years, the IRS has also had procedures permitting certain affiliated organizations to obtain recognition of their exemption on a group basis rather than by filing separate applications.
Under the group procedure, an organization (called the central organization) submits a request for recognition of exemption for a group of organizations that are affiliated with it and under its general supervision and control (called the subordinate organizations). If the IRS grants this request, the central organization is authorized to add other similar subordinates to the group and to delete subordinates that no longer meet the group exemption requirements.
Group exemptions are an administrative convenience for both the IRS and charities with many affiliated organizations. Subordinates in a group exemption do not have to file, and the IRS does not have to process separate applications for exemption. Consequently, subordinates do not receive individual exemption letters.
Substantial changes in procedures
In May of 2020, the IRS issued a notice with substantial changes to the group tax-exemption procedures. These changes are significant to denominations that have a group ruling and churches that are covered by the ruling.
Read about these substantial changes, along with other important details, in my article “IRS Updates Group Exemption Procedure.”
#10: Donations for use of church parking lot are exempt, says a Wisconsin appeals court
Background
A Milwaukee church holds worship services and provides multiple religious, educational, social, and recreational activities and programs. The church staff consists of one pastor, one part-time assistant, and one caretaker who maintains the church building and parking lot and resides at the church. The church is dependent on volunteers for extra services and is dependent on donations to maintain its operations.
The church campus consists of its church building and an adjacent parking lot with 43 stalls. The parking lot is available for free to anyone attending the church for any of its various programs. The church campus is in close proximity to a popular concert hall.
In 2012, the church began allowing concertgoers parking in exchange for a donation to the church. Approximately four times a month, volunteers held up signs reading “Parking $10.00 donation.” Most users paid the $10.00, however volunteers also allowed concertgoers to donate on a sliding scale or not donate at all. In 2016, the church collected $15,672 from parking donations. In 2017, it collected $22,856 from parking donations.
The assessor’s office reclassifies the parking lot as “local mercantile”
In September 2017, the City of Milwaukee notified the church that its assessor’s office changed the parking lot’s classification from “exempt” to “local mercantile.” The City assessed the lot’s value at $146,000, resulting in a tax bill of $4,416. The church filed a lawsuit seeking a ruling that it was exempt from taxation. The trial court ruled that the church was not eligible for an exemption from tax, and the church appealed.
Parking lot donations same as “donations from the other sources”
On appeal, the City argued that because the lot was being used for concertgoers, the church did not use it exclusively for purposes of the church as required for exemption. The church claimed that it was entitled to an exemption under section 70.11(4) of the Wisconsin statutes, which exempts “property owned and used exclusively by . . . benevolent associations.” To qualify for total exemption under that section, an organization must show that it “(1) is a benevolent association, (2) owns and exclusively uses the property, and (3) uses the property exclusively for exempt purposes.”
The church argued that the parking lot donation revenue was used for benevolent purposes, thus entitling the church to tax exemption. And, even if the lot was not used exclusively for benevolent purposes, the church argued, any use of its parking lot by concertgoers was simply an incidental use of the property that did not affect its exempt status.
The Wisconsin Court of Appeals District I noted that “the dispute in this case centers on whether the church exclusively uses its parking lot for benevolent purposes, or whether the use at issue qualifies as incidental, rendering the exemption applicable even if the use is not exclusively for benevolent purposes.” The court concluded that the church property was entitled to exemption. It concluded:
We conclude that the only distinguishing factor between donations brought in from [the church] parking lot and donations brought in from other sources, such as individual donations, bake sales, or car washes, is that the parking lot donations bring in a significant amount. The church’s use of the parking lot donation revenue is the same as its use of donations from the other sources. All donations support the functioning of the church and its many activities, ranging from community support groups, to food pantries and mission trips, to children’s activities, to Bible school. Therefore, while the amount brought in by the parking lot use may not necessarily be inconsequential, as the circuit court found, it certainly is incidental. For the foregoing reasons . . . conclude that [the church] parking lot is tax exempt . . . [and the church] is entitled to recovery of taxes paid. Central Methodist Church v. City of Milwaukee, 942 N.W.2d 355 (Wisc. App. 2020).
Tip. See this collection of articles to learn how church-run ventures could trigger tax liability.
