Must We Comply with a Subpoena for Giving Records?

Six things to note when a legal request for information is made to the church.

Last Reviewed: January 24, 2025

Q: Our church received a subpoena requesting the donation records of someone in our congregation. The person is in a court case involving child support, and his ex-wife’s lawyer wants to see how much money he has been giving to the church to prove he’s making more than he says. Do we have to comply?


Are Church Records Privileged?

Church records are not inherently “privileged.” The term “privilege” or “privileged” refers to evidence that is not admissible in court because of some fundamental public policy. Records that are not privileged generally are subject to the subpoena power like any other organization. No state or federal law confers special “privileged” status on all church records.

There may be a very limited exception for notes created by a pastor that summarize the content of counseling sessions with parishioners if the sessions qualify for the clergy-penitent privilege under state law. In general, this means that the counseling consisted of confidential, spiritual counsel with the minister. But aside from this, neither the courts nor state or federal legislatures have recognized any generalized privilege for church records.

What About Subpoenas Issued by Other States?

A subpoena issued by a state court ordinarily is unenforceable outside the state, or in some cases the county, where it was issued. However, it is possible in some cases for a subpoena issued by a court in one state to be “processed” in another state. This requires additional work, and so many attorneys seek to avoid this step by attempting to have a church voluntarily respond to a subpoena that technically is not enforceable because it was issued by a court in another state.

Nearly 30 states have enacted the Uniform Interstate Depositions and Discovery Act, which allows subpoenas issued in one state to be enforceable in another, under some conditions. So, church leaders should not assume that a subpoena issued by a court in another state is not enforceable.

Does the Church Audit Procedures Act Apply?

The federal Church Audit Procedures Act allows church records to be subpoenaed under some circumstances. This demonstrates the absence of any general church records “privilege” and highlights that compliance with subpoenas may be required.

If any doubts exist regarding a church’s legal obligation to respond to a subpoena, it is essential to consult with legal counsel. Legal professionals can provide guidance specific to the jurisdiction and the circumstances surrounding the subpoena.

FAQs

What is the Church Audit Procedures Act?

The Church Audit Procedures Act is a federal law that allows church records to be subpoenaed under specific circumstances, particularly in cases related to financial audits and compliance.

Are all church records subject to subpoena?

Yes, most church records are subject to subpoena unless they fall under a limited exception, such as the clergy-penitent privilege for counseling notes.

Can subpoenas from another state be enforced?

Subpoenas issued by a state court are generally not enforceable outside the issuing state unless processed through mechanisms like the Uniform Interstate Depositions and Discovery Act.

What should we do if unsure about compliance?

Consult with legal counsel to determine the appropriate course of action. They can assess whether the subpoena is enforceable and provide guidance on compliance.

For more detailed guidance, refer to the IRS resources or consult legal experts familiar with church-related cases.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Should Ministers Prepare Their Own Tax Returns?

Discover whether ministers should prepare their taxes themselves or hire a professional, plus tips to avoid mistakes.

Last Reviewed: January 9, 2025

Ministers can prepare their own tax returns. While ministers’ taxes include unique rules, they are not overly complex. Unfortunately, many people confuse uniqueness with complexity. With some effort, most ministers should be able to comprehend these rules sufficiently to prepare their own tax returns. Resources like the Church & Clergy Tax Guide and IRS Publication 17 (Your Federal Income Tax) provide essential guidance.

When Should Ministers Prepare Their Own Taxes?

  • Ministers who want to save on tax preparation fees may consider doing it themselves.
  • Unique rules for ministers’ taxes can be managed with proper resources and study.
  • For simpler cases, following trusted guides is often sufficient.

When to Hire a Professional

Some ministers may prefer hiring a professional tax preparer for convenience or confidence. If this is your choice, keep the following in mind:

  • Select someone with experience preparing ministers’ tax returns—ideally a tax attorney or CPA.
  • Share resources like the Church & Clergy Tax Guide to ensure accuracy.

What to Know Before Hiring a Tax Preparer

Consider these factors before deciding to have someone else prepare your taxes:

  • An IRS study found more than half of returns prepared by paid preparers contain errors.
  • Common mistakes include:
    • Failing to claim the standard deduction.
    • Entering incorrect amounts or filing with the wrong status.
    • Filing unnecessary schedules, such as Schedule SE when earnings are below $400.
  • Paid preparers face penalties for filing returns with unreasonable positions, discouraging aggressive strategies.

Risks with Nonprofessional Preparers

Be cautious when working with nonprofessional or mail-order tax preparers. Avoid those who promise excessive tax savings or lack qualifications, like attorneys or CPAs. The IRS Return Preparer Program audits preparers who disregard federal tax laws.

Key Takeaways

  • Ministers can confidently prepare their own taxes using reliable resources.
  • If hiring a professional, ensure they are qualified and familiar with clergy-specific rules.
  • Avoid preparers who lack professional credentials or make unrealistic promises.

For comprehensive guidance, refer to the Church & Clergy Tax Guide.

FAQs

1. Can ministers deduct expenses if they prepare their own taxes?

Yes, ministers may deduct eligible expenses like resources or software used to prepare their taxes.

2. What are the risks of filing taxes without professional help?

While ministers can self-prepare, they must carefully follow clergy tax rules to avoid errors that may trigger audits or penalties.

3. Should a minister file taxes if they earn below $400?

Yes, ministers must still report earnings, even if their net self-employment income falls below $400.

4. Are mail-order tax preparers safe for clergy taxes?

No, it is best to work with licensed professionals, like CPAs or tax attorneys, experienced in clergy-specific tax rules.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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Understanding Minister Federal Income Tax Requirements

Explore essential details about minister federal income tax requirements, including common misunderstandings, penalties, and compliance tips.

Last Reviewed: January 8, 2025

Ministers are not exempt from paying federal income taxes. Since 1943 (Murdock v. Pennsylvania, 319 U.S. 105), the United States Supreme Court has ruled that the First Amendment guarantee of religious freedom is not violated by subjecting ministers to federal income tax.

For more on this topic, see chapter 1 of Richard Hammar’s annual Church & Clergy Tax Guide.

Key Takeaways:

  • Ministers are subject to federal income tax on all income, including earnings from ministerial duties.
  • Exemptions from tax withholding do not equate to exemption from paying taxes.
  • Arguments claiming religious or legal exemptions from federal income tax have consistently been rejected by the courts.

Understanding Ministerial Income Tax Obligations

Ministers may mistakenly believe that certain exemptions from withholding mean they are exempt from paying taxes. This is not the case. One court ruling helps clarify this misunderstanding:

In Pomeroy v. Commissioner, 2003-2 USTC 50,568 (D. Nev. 2003), a federal court ruled that income received by ministers, whether from a church or private sources, is not exempt from federal income tax. The court noted:

  • Ministers’ income, even from religious activities, must be included in gross income for tax purposes.
  • The exemption from income tax withholding does not mean exemption from the obligation to pay income taxes.
  • A church’s tax-exempt status does not extend to the personal income of its ministers.

Common Frivolous Tax Arguments

Despite clear legal precedent, some tax protestors use religion or flawed legal interpretations to attempt to avoid paying taxes. The IRS and courts have consistently rejected these arguments, including:

  • The claim that the Sixteenth Amendment is invalid.
  • The idea that placing assets in offshore accounts or trusts eliminates tax liability.
  • The argument that filing a tax return is voluntary.
  • The assertion that Federal Reserve notes are not taxable income.

Congress has enacted penalties to discourage these arguments, including a $5,000 penalty for frivolous tax positions and a $25,000 penalty for maintaining frivolous arguments in Tax Court (IRC 6702, 6673).

The Corporation Sole Scam

One common tax scam involves promoting the use of “corporations sole” by churches and individuals to evade taxes. Promoters claim that structuring a church or individual as a corporation sole exempts them from tax and government regulation. These claims are false. Consider the following:

  • Only the presiding officer of a religious organization can form a corporation sole, not the church itself.
  • Corporation sole statutes clarify that these entities are subject to all government laws and regulations.
  • Incorporating as a corporation sole does not exempt a church from its obligations, such as withholding taxes, issuing W-2s, or filing IRS forms.

Example: Oregon’s corporation sole statute specifies that such entities are managed by a single director and have no board of directors, but this does not exempt them from tax compliance.

The IRS has issued warnings about the misuse of corporations sole (see Revenue Ruling 2004-27). Courts have consistently deemed arguments for tax exemption based on corporations sole as frivolous and imposed penalties on promoters and participants.

Ministers and Church Leaders: Stay Compliant

Ministers and church leaders should be cautious about tax scams and seek guidance from qualified professionals. Ensuring compliance with federal income tax laws protects both individual ministers and the church community from penalties and legal issues.

FAQs

  • Are ministers exempt from federal income taxes?
    No, ministers are required to pay federal income taxes on all income, including earnings from ministerial duties.
  • Does tax withholding exemption mean no taxes are due?
    No, exemption from withholding does not equate to exemption from paying taxes.
  • What is a corporation sole?
    A corporation sole is a legal entity for religious leaders but does not exempt them or their church from tax obligations.
  • What should ministers do if they are unsure about tax compliance?
    Consult a CPA or tax attorney for guidance on meeting federal tax requirements.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Can a Church Revoke an Irrevocable Retirement Benefit Commitment?

Church boards may attempt to revoke irrevocable retirement benefits, but legal factors like consideration and detrimental reliance may impact enforceability.

Q: When I retired as pastor, the church board took “irrevocable” action to provide full health coverage for my wife and me as long as we were alive. Recently I received a call from the current pastor stating that the board wants to cancel the health insurance benefits to my wife and me. The pastor stated that they are taking action because “they can change anything from past action.” Can an “irrevocable” commitment be changed?


Understanding the concept of ‘consideration’

A unilateral promise is revocable according to well-established legal principles. For example, a church board’s irrevocable promise to pay a pastor’s health insurance for life may in fact be revocable.

However, it is also well-established that unilateral promises can become irrevocable if they are supported by some form of “consideration.”

Consideration is a legal concept that means something of value.

To illustrate, X’s promise to provide a benefit to Y is unenforceable because X receives nothing of value (consideration) for his promise. X’s promise can become enforceable if he receives something of value from Y. Ordinarily this would be money or services. But, the courts also recognize some “exceptions” to the consideration requirement, which include “detrimental reliance.” That is, if X makes a unilateral promise to Y, and receives no consideration for it, that promise can become enforceable if Y relies to his detriment upon X’s promise.

In your case, it could be argued that your decision to forego salary increases was based on the church board’s irrevocable promise to provide health care coverage. Your detrimental reliance on the board’s promise could make that promise enforceable, even though the board received no consideration from you. Obviously, a definitive legal opinion in such cases depends on a full knowledge of all the surrounding facts and circumstances. Only an attorney apprised of all the facts would be able to provide a legal opinion.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Funding Foreign Activities: What Churches Need to Know

Key considerations for churches conducting foreign missions, including tax compliance, grantmaking, and safeguarding funds for international outreach.

Last Reviewed: May 8, 2025

Foreign mission work offers churches powerful opportunities to expand their impact globally. However, these activities come with complex legal and tax requirements. Understanding the rules is essential for maintaining compliance and ensuring your mission’s success.


Key Areas to Understand

Tax-Deductible Contributions

Donors often want to claim tax deductions for gifts supporting foreign missions. To meet Internal Revenue Service (IRS) requirements, churches must:

  • Maintain full control over donated funds.
  • Use funds solely for charitable purposes.
  • Avoid acting as a conduit—don’t pass along designated gifts directly to individuals or foreign entities without oversight.

Example:
A gift specifically designated for a missionary is not tax-deductible unless the church retains discretion over how the funds are used.

To stay compliant:

  • Keep proper documentation.
  • Regularly review how funds are used.
  • Ensure clear policies are in place.

Short-Term Mission Trip Guidelines

Mission trip expenses are usually tax-deductible—if the trip’s primary purpose is charitable.

To qualify:

  • Expenses must directly relate to volunteer or ministry work.
  • Trips that include substantial personal pleasure or recreation may disqualify the deduction.
  • Churches must document:
    • Detailed itineraries
    • Dates and purposes of each day
    • Expense breakdowns

Churches should clearly explain these rules to participants in advance to avoid misunderstandings.


Grantmaking to Foreign Organizations

When providing grants to foreign organizations, churches must ensure funds are used properly and legally.

Best practices include:

  • Vetting the foreign organization’s operations and governance.
  • Using written grant agreements outlining how funds will be used.
  • Requiring expenditure reports and documentation.
  • Seeking legal review or opinions when needed.

Maintaining oversight helps protect the church’s tax-exempt status and keeps donations tax-deductible.


Payments to Foreign Nationals

Churches must handle payments to foreign nationals with care, depending on where services are performed:

  • If services are provided in the U.S.:
    • IRS withholding and reporting rules likely apply.
  • If services are provided outside the U.S.:
    • Treat payments as grants.
    • Ensure proper accountability and documentation.

Following IRS rules is critical to avoid penalties and protect both the church and the recipient.


Anti-Terrorism Compliance

U.S. anti-terrorism laws apply to all foreign mission activities. Churches must take steps to avoid inadvertently funding prohibited individuals or groups.

Key steps include:

  • Screening all transactions against government watch lists.
  • Filing required Treasury Department forms for any foreign bank accounts.
  • Staying up to date with Office of Foreign Assets Control (OFAC) regulations.

Warning:
Noncompliance can result in severe penalties, including criminal charges.


FAQs: Foreign Mission Activities

1. Can donations for foreign missions be tax-deductible?
Yes—if the church maintains control and discretion over the funds and uses them for charitable purposes.

2. Are personal expenses on mission trips deductible?
No. Only expenses for charitable activities are deductible. Costs for personal days must be excluded.

3. What documentation is needed for foreign grants?
Churches should use:

  • Written agreements
  • Detailed spending reports
  • Periodic reviews or audits

4. How do churches comply with anti-terrorism laws?

  • Screen all transactions against U.S. sanctions lists.
  • File the necessary forms for foreign financial accounts.

Final Tip

Foreign mission work is rewarding but legally complex. To stay compliant:

Stay current on IRS and federal regulations.

Work with legal and financial professionals.

Develop strong internal policies.

For additional guidance, consult legal and financial professionals familiar with the complexities of foreign mission activities.

We’ve used a combination of AI and human review to make this content easier to read and understand.

Frank Sommerville is a both a CPA and attorney, and a longtime Editorial Advisor for Church Law & Tax.

A Gift Freely Given? Understanding the Concept of Undue Influence

Discover how church leaders can navigate undue influence claims in donations and safeguard gifts while upholding ethical standards.

Last Reviewed: January 17, 2025

Gifts to churches by elderly members are common. With an estimated $40 trillion being transferred between generations, there is significant opportunity for charitable giving. However, some gifts are challenged by family members due to concerns over mental capacity or undue influence. This article examines these issues and offers guidance for church leaders.

What Is Undue Influence?

Undue influence occurs when a donor’s free will is compromised through force, coercion, or overpersuasion. This can invalidate a gift made to a church or charity. Family members may claim that the donor was coerced or mentally incapable, especially if substantial gifts are involved.

Key Factors Considered in Undue Influence Claims

  • Whether the gift was the result of hasty action.
  • If the gift was concealed from others.
  • Whether the beneficiary actively secured the gift.
  • If the gift aligns with the donor’s previous declarations and plans.
  • The donor’s age, physical condition, and mental health.
  • Whether a confidential relationship existed between the donor and recipient.
  • If the donor had independent legal advice.

To validate a gift, the donor must have sufficient mental capacity at the time of making it. This means understanding the natural recipients of their estate, their property, and forming a clear plan for its distribution.

Case Example: Curran v. Building Fund of United Church

This Vermont case highlights the legal complexities of undue influence. A testator amended their trust to include community organizations, including a church. Family members challenged the trust, citing mental incapacity and undue influence. The court upheld the trust amendment, citing evidence that the donor understood their decisions and acted of their own free will.

Guidance for Church Leaders

To reduce the risk of gifts being invalidated, church leaders can:

  • Ensure donors obtain independent legal advice when drafting wills or trusts.
  • Avoid situations where the church appears to coerce or influence decisions.
  • Document all communications with donors to demonstrate transparency.

Following these best practices can help safeguard the church’s reputation and ensure gifts are implemented as intended by donors. Independent counsel, especially from attorneys not affiliated with the church, is critical in these cases.

Conclusion

As the number of elderly donors increases, so do potential challenges to their gifts. Church leaders must be prepared to navigate these situations with care, ethical considerations, and legal compliance. By fostering transparency and securing independent legal advice for donors, churches can honor donor intentions while reducing the risk of undue influence claims.

FAQs

What is undue influence?

Undue influence involves coercion or manipulation that compromises a donor’s free will when making a gift.

How can churches avoid undue influence claims?

Churches can avoid claims by ensuring donors seek independent legal advice and avoiding involvement in drafting wills or trusts.

What happens if a gift is challenged in court?

If a gift is challenged, courts will examine the donor’s mental capacity, evidence of undue influence, and the circumstances surrounding the gift.

Are gifts from elderly donors more likely to be challenged?

Yes, gifts from elderly donors may be scrutinized more due to potential concerns over mental capacity or susceptibility to influence.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Proper Use of a Benevolence Fund for Church Member Assistance

Ensure your church’s benevolence fund is administered legally and effectively to help members in need without risking tax-exempt status.

Last Reviewed: January 24, 2025

Q: Recently, one of our member’s families lost their 15-year-old son. They contacted the church and asked if donations for the family could be handled through the church. We agreed and processed all donations received as cash exchange. Is this proper?


When a church is asked to handle donations for a family in need, ensuring the process complies with legal and tax regulations is essential. The following guidelines provide clarity on the best practices for administering a benevolence fund and avoiding potential pitfalls.

Key Considerations for Handling Donations

  • Direct Gifts: Individual believers may give up to $14,000 directly to another individual without gift tax consequences. These gifts are generally not taxable to the recipient and are not tax-deductible for the donor.
  • Church as a Conduit: If donors direct the church to pay funds to a specific family, these contributions are not tax-deductible. The church must not serve the private interests of the donors or recipients, as this violates federal tax-exempt purposes.

The Importance of a Benevolence Fund

To handle requests like these properly, churches should establish a benevolence fund. This fund ensures assistance is provided legally and aligns with the church’s tax-exempt purpose.

Steps to Create a Benevolence Fund

  1. Adopt a Written Policy: The church’s governing body should define the following:
    • A charitable class eligible for assistance (e.g., the poor, distressed, or ill).
    • The types of needs the fund will cover (e.g., food, shelter, clothing, medical expenses).
    • The documentation required for disbursement (e.g., applications, invoices, proof of financial need).
  2. Encourage Donations: Solicit contributions to the benevolence fund without designating individual recipients.
  3. Review Applications: Ensure recipients meet the criteria by reviewing their applications and supporting documents (e.g., bank statements, unpaid invoices).
  4. Make Payments Directly: Payments should only cover documented expenses and align with the fund’s defined purposes.

Example of a Benevolence Fund in Action

Here’s how a benevolence fund could assist the family mentioned:

  • The family applies to the fund for funeral expense reimbursement.
  • The application includes the funeral home invoice and proof of financial need (e.g., recent bank statements).
  • The church’s benevolence committee reviews the request. If approved, the fund directly pays for the documented funeral expenses.

Potential Issues with Non-Compliant Donations

  • Private Benefit: Direct payments to individuals that exceed documented need or donor-directed contributions can jeopardize the church’s tax-exempt status.
  • Non-Deductible Contributions: Donors lose the tax deduction if they designate specific recipients rather than donating to the church’s general benevolence fund.

FAQs About Benevolence Funds

What is a benevolence fund?

A benevolence fund is a church-administered fund created to assist individuals in a defined charitable class, such as the poor, ill, or distressed.

Can donors designate a specific recipient?

No. Contributions must not be donor-directed to an individual; otherwise, they are not tax-deductible, and the church risks violating tax-exempt regulations.

What documentation is required for disbursements?

Applications must include proof of financial need and documentation of expenses, such as invoices or receipts.

How can the church avoid private benefit violations?

By ensuring the fund operates according to a written policy, disburses funds only for defined charitable purposes, and maintains control over contributions.

Conclusion

Administering a benevolence fund properly allows churches to help those in need while maintaining compliance with tax laws and preserving their tax-exempt status. By following these guidelines, churches can ensure their assistance aligns with both biblical principles and legal requirements.

For more information on benevolence programs, see Church Law & Tax.

Frank Sommerville is a both a CPA and attorney, and a longtime Editorial Advisor for Church Law & Tax.

Maximizing Church Energy Efficiency: Cost-Saving Strategies for Sustainable Buildings

Improve your church’s energy efficiency with expert strategies to reduce costs and create a sustainable worship space.

Last Reviewed: February 11, 2025

For church administrators, balancing church energy efficiency with upfront costs and long-term savings can be challenging. However, with proper planning and smart building strategies, churches can lower their energy consumption, reduce maintenance costs, and contribute to environmental sustainability.

Ensuring Proper Elevation for Moisture Control

Ground elevation plays a crucial role in energy efficiency and building durability. According to Albert R. Luper of Worship Concepts, “The ground elevation can almost never go too high. But it can go too low. If the ground elevation is too low you will always have moisture problems, which means rot and mold.” For large churches with concrete flooring, keeping floors at least 12 inches above grade ensures proper air circulation and moisture control. Luper says, “A wood floor should go 20 inches or higher above grade.”

Optimizing Insulation for Maximum Efficiency

Proper insulation is key to maintaining a comfortable indoor climate while minimizing energy costs. “You are always struggling with thermodynamics,” says Luper. Insulation should meet high R-value standards, such as R-19 for walls and R-22 or higher for advanced methods like Insulated Concrete Forms (ICF). In steel structures, insulation around metal sheeting is critical to preventing condensation and rust, ensuring long-term building integrity. Doug Mattox of Mattox Construction, Inc., adds, “Instead of placing the brick veneer directly next to metal sheeting, we recommend building a six-inch stud wall for the exterior wall and insulating it properly.”

Advancements in Concrete and Wall Construction

Modern techniques such as ICF and Concrete Form Masonry (CFM) improve insulation efficiency while maintaining durability. “This method is in the R-22 insulation range and is very efficient,” says Dale R. Yoder of Cornerstone Design Architects.

Energy-Efficient Roof Design

Churches with large structures benefit from steel trusses over wood due to durability and cost-effectiveness. Additionally, a “cool roof” design, incorporating heat-reflective pigments, helps reduce heat absorption, extending the roof’s lifespan and lowering cooling costs. Proper insulation, such as dense polystyrene boards, further enhances efficiency. Jim Peckham of VP Buildings notes, “You don’t need to worry about painting it for 20 years, and maintenance costs are considerably reduced.”

Windows and Daylight Optimization

Reflective insulated glass and daylight analysis strategies can maximize natural light while minimizing energy costs. “Look at the positioning of the building so you have glass east and west to take most advantage of natural lighting,” says Brady Eggleston of Century Builders.

Efficient Heating and Cooling Solutions

Heating, ventilation, and air conditioning (HVAC) systems significantly impact energy efficiency. Geoexchange systems, which use underground temperatures for heating and cooling, offer a sustainable alternative to traditional HVAC. “We do large churches and wind up zoning buildings—using a split system rather than a central plant for heating and cooling,” says Eggleston.

LED Lighting and Energy Management Systems

Upgrading to LED lighting reduces electricity use by up to 80%. Reflective ceiling colors and well-placed fixtures further enhance efficiency. Implementing an energy management system, ranging from basic programmable thermostats to automated Internet-based controls, optimizes energy use while reducing costs. “A moderately priced system might cost $15,000, but a really good control system that runs on the Internet can cost from $25,000 to $40,000,” says Luper.

Environmental Sustainability and Green Building Initiatives

The U.S. Green Building Council’s LEED certification promotes energy-efficient building standards. Many churches are adopting these guidelines to improve sustainability, reduce environmental impact, and ensure long-term savings. “There’s a huge effort in the United States for ‘green buildings,’ which are environmentally friendly and have a long-term sustainability,” says Peckham.

Cost-Saving Maintenance Tips

  • “You can spend a lot on an expensive roof, then cheapen it up with inexpensive flashing, which may look great but does not have the same life expectancy,” warns Luper.
  • Minimize roof penetrations to prevent leaks and structural damage.
  • Invest in high-quality exterior paints for long-term protection. “One of the things I often see in budgets is cheapening up on paints,” says Luper. “In my opinion, this is a big mistake.”
  • Use recessed metal mats at entrances to reduce dirt buildup and maintenance costs. “Every pound of dirt caught in them costs six dollars to remove, but six hundred dollars to remove if it gets into the carpet,” Luper adds.
  • Maintain proper attic ventilation to regulate indoor temperatures efficiently.
  • Choose high-thread-count carpets and durable flooring materials to extend their lifespan.

FAQs on Church Energy Efficiency

How can churches reduce energy costs?

Churches can lower energy expenses by upgrading insulation, using energy-efficient lighting, and optimizing HVAC systems with smart zoning controls.

What are the benefits of using LED lighting in churches?

LED lighting reduces electricity usage, lowers maintenance costs, and generates less heat, decreasing cooling demands.

Are there grants available for church energy efficiency improvements?

Yes, churches may qualify for federal and state energy grants. Visit energy.gov to explore funding options.

What role do solar panels play in church sustainability?

Solar panels reduce reliance on nonrenewable energy sources, providing long-term savings and environmental benefits.

By implementing these energy-efficient strategies, churches can reduce operational costs, improve sustainability, and create a more comfortable worship environment for their communities.

This article originally appeared in Your Church magazine. It has since been optimized to allow a better reading experience using artificial intelligence tools.

Managing Credit Card Transaction Fees for Church Donations

Understand how to manage credit card transaction fees for church donations effectively and ensure proper accounting practices.

Last Reviewed: January 9, 2025

Q: We just began accepting credit card donations via a national processing service. We were told that the full amount of each contribution is tax deductible, even the portion that the service takes out for credit card processing fees.


Churches are increasingly accepting credit card donations, providing convenience for donors while raising questions about proper accounting practices. A common concern is whether the full donation amount, including the credit card transaction fees, is tax-deductible. Here’s what you need to know to manage these fees and maintain compliance.

Are Credit Card Fees Tax Deductible?

Yes, the full donation amount—including the portion deducted for credit card transaction fees—is considered tax-deductible for donors. This means your acknowledgment to the donor should reflect the full amount of their gift, even though the church does not receive the total amount after fees are deducted.

How to Record Credit Card Donations

The best practice for recording credit card donations is as follows:

  • Record the full donation amount as income.
  • Track the credit card processing fee as an operating expense.

For example, if a donor contributes $100 and the processing fee is $3, the church should record $100 in donation income and $3 in expenses. This approach accurately reflects the full donation while accounting for the expense of processing the transaction.

Should Credit Card Fees Be Recorded as Negative Contributions?

It is not advisable to record credit card fees as negative contributions. Doing so could complicate financial reporting and cause confusion during audits. Instead, treat these fees as operational costs necessary for accepting donations. This is similar to other bank service charges incurred by the church.

Tracking Credit Card Fees for Auditing Purposes

To ensure proper financial management and transparency, consider these tips for tracking credit card fees:

  • Set up a dedicated expense account for credit card processing fees in your accounting system.
  • Review monthly statements from your payment processor to reconcile fees accurately.
  • Provide clear documentation of fees and donation amounts during financial audits.

Conclusion

Managing credit card transaction fees for church donations requires careful accounting to ensure accuracy and compliance. By treating these fees as operating expenses and acknowledging the full donation amount for donors, churches can maintain financial transparency and build trust with their supporters.

FAQs About Credit Card Transaction Fees for Church Donations

1. Are credit card fees tax-deductible for donors?

Yes, donors can deduct the full amount of their contribution, even though a portion is used for transaction fees.

2. How should churches record credit card fees?

Churches should record the full donation amount as income and the transaction fees as an operating expense.

3. Is it acceptable to record fees as negative contributions?

No, recording fees as negative contributions is not recommended. It is more appropriate to categorize them as operational costs.

4. How can churches track credit card fees effectively?

Use a separate expense account in your accounting system and reconcile monthly statements to track fees accurately.

For further information on best practices for managing church donations, visit IRS Charities and Nonprofits.

Michael (Mike) E. Batts is a CPA and the managing partner of Batts Morrison Wales & Lee, P.A., an accounting firm dedicated exclusively to serving nonprofit organizations across the United States.

What Churches Should Do with Nondeductible Donations

Best practices for handling nondeductible donations in churches to ensure compliance and donor transparency.

Last Reviewed: January 24, 2025

Church treasurers often face situations where members attempt to contribute funds for specific individuals or families. These contributions may not qualify as tax-deductible. Here’s how to handle nondeductible donations effectively while ensuring compliance with IRS guidelines.

Four Options for Handling Nondeductible Donations

1. Refuse to Accept the Check

According to IRS Publication 3833, donations earmarked for specific individuals or families are not tax-deductible. In such cases, church treasurers should decline to accept the check. This avoids any misrepresentation of the contribution’s tax status.

2. Accept the Check and Stamp it “NONDEDUCTIBLE”

If the church decides to accept the check, stamp it “NONDEDUCTIBLE” in red ink on its face. This ensures the donor cannot use the canceled check to claim a charitable contribution deduction. Be sure not to include these funds in the donor’s contribution summary.

3. Mark Nondeductible Contributions in the Summary

Place an asterisk by nondeductible contributions in the donor’s summary. However, for contributions under $250, donors may still attempt to use canceled checks for deductions. Churches must remain vigilant in marking and tracking these transactions to avoid unintended deductions.

4. Avoid Honoring Every Donor Recommendation

Consistently honoring every donor “recommendation” about fund recipients may indicate the church lacks control over the funds. This undermines the contributions’ eligibility as charitable donations. According to the IRS, organizations must exercise full control and discretion over how donated funds are used.

Review Your Church’s Charter

If your church administers a benevolence fund, review its charter to ensure it includes “charitable” as well as “religious” purposes. Some legal precedents suggest that benevolence activities align more with charitable purposes than religious ones for tax purposes.

Determining Benevolence Eligibility

To determine if a recipient qualifies for benevolence assistance, consider the federal poverty guidelines published by the U.S. Department of Health and Human Services (HHS). While these guidelines are persuasive, they are not officially adopted by the IRS or courts as definitive criteria.

Tip: Learn more about establishing a benevolence program at your church by exploring Benevolence Fund Basics.

FAQs about Nondeductible Donations

What is a nondeductible donation?

A nondeductible donation is a contribution earmarked for a specific individual or family rather than for a church or charitable organization’s general purposes.

Can donors deduct earmarked contributions?

No. According to IRS guidelines, contributions earmarked for specific individuals are not tax-deductible.

Should churches refuse all nondeductible donations?

Churches may accept such donations but must ensure transparency by marking them as nondeductible and not including them in tax-deductible giving summaries.

How can churches ensure compliance with IRS rules?

Churches should establish written policies for benevolence funds, including criteria for eligibility and documentation requirements, to maintain compliance with tax regulations.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Sample Benevolence Fund Policy For Churches

Use this sample benevolence fund policy for churches to establish a framework for benevolent programs and donations.

Last Reviewed: January 16, 2025

[Church name], in the exercise of its religious and charitable purposes, has established a benevolence fund to assist persons in financial need.

The church welcomes contributions to the fund.

Donors are free to suggest beneficiaries of the fund or of their contributions to the fund. However, such suggestions shall be deemed advisory rather than mandatory in nature. The administration of the fund, including all disbursements, is subject to the exclusive control and discretion of the church board. The church board may consider suggested designations, but in no event is it bound in any way to honor them, since they are accepted only on the condition that they are merely nonbinding suggestions or recommendations. As a result, donors will not be entitled to a return of their designated contributions on the ground that the church failed to honor their designations.

Donors wishing to make contributions to the benevolence fund subject to these conditions may be able to deduct their contributions if they itemize their deductions on their federal income tax return. The church cannot guarantee this result and recommends that donors who want assurance that their contributions are deductible seek the advice of a tax attorney or CPA. Checks should be made payable to the church, with a notation that the funds are to be placed in the church benevolence fund.

[Board Name],
[Church Name]

This sample was taken from Richard Hammar’s annual Church & Clergy Tax Guide.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Effective Benevolence Programs for Churches: A Guide to Success

Benevolence programs for churches: Best practices for effective and compliant support systems.

Last Reviewed: January 20, 2025

In churches and other nonprofits, benevolence programs are essential for meeting the needs of under-resourced individuals—those who cannot meet essential needs for themselves or their families. These programs stem from a church’s desire to do good, extend kindness, and provide charity to those in need. While most benevolence programs involve financial support, any resource-providing initiative falls under this category.

The Concept of a Charitable Class

For a benevolence program to align with a church’s tax-exempt status, it must serve a “charitable class.” This includes groups such as children, the elderly, or the underprivileged. Importantly, the class must be large or indefinite to avoid benefiting private interests. For instance, Private Letter Ruling 201205011 illustrates that programs serving small, specific groups—like a single family—do not meet the criteria.

Key Points:

  • If a program does not serve a valid charitable class, it likely does not meet the criteria for tax exemption.
  • Most benevolence programs aim to assist individuals experiencing financial hardships or unusual stressors.

Structuring a Benevolence Program

Successful benevolence programs are well-structured, ensuring both efficiency and compliance with exempt status requirements. According to IRS guidelines, a formal structure safeguards both church employees and the decision-making process.

Essential Elements:

  • Verification Process: Applicants should provide proof of need and belong to a charitable class.
  • Application and Documentation: Use forms to document the decision-making process, including proof of payment guidelines.
  • Policy Guidelines: Clearly outline approval processes, types of needs supported, and other requirements.
  • Tax Considerations: Payments to third parties may require reporting, such as Form 1099-NEC or Form 1099-MISC.

Example Policies:

  • Define approval authorities and limits.
  • Determine eligibility criteria for church members versus the community.
  • Prohibit linking benevolence to tithing records.

Special Considerations

Discretionary Funds

Discretionary funds used for benevolence must meet documentation requirements. Ministers should complete applications on behalf of recipients when necessary.

Repeat Requests

Churches should plan for long-term needs, such as chronic illnesses, by:

  • Obtaining board approval for extended assistance.
  • Reevaluating needs regularly.
  • Helping recipients explore other resources.

Designated Gifts

Churches cannot accept contributions earmarked for individuals. Instead, solicit donations for the benevolence fund to maintain compliance.

Employee Benevolence

According to Internal Revenue Code Section 102, benevolence for employees is taxable. Assistance for employees or their family members must be carefully documented and reported appropriately.

Exceptions Under IRC Section 139

During IRS-declared disasters, churches may offer tax-free assistance to employees and eligible family members.

FAQs About Benevolence Programs for Churches

What is a benevolence program? A program designed to provide financial or resource-based aid to those in need, operated within a church’s charitable guidelines. Are benevolence programs tax-exempt? Yes, if they serve a valid charitable class and comply with IRS regulations. Can churches accept designated gifts for individuals? No, donations must be directed to the benevolence fund, not specific individuals. Are benevolence payments taxable? They are not taxable to recipients unless the recipient is an employee of the church.

Benevolence programs provide essential support for individuals in need. By following structured policies and compliance guidelines, churches can maximize their impact while adhering to legal and ethical standards.

Elaine L. Sommerville is licensed as a certified public accountant by the State of Texas. She has worked in public accounting since 1985.

Understanding the Importance of Church Cash Reserves

Discover why cash reserves are essential for churches, with tips on establishing them and explaining their importance to church leadership.

Last Reviewed: January 27, 2025

Editor’s note. We frequently field questions from churches about cash reserves. A general rule of thumb is for churches to maintain a minimum of three months of cash on hand related to expenses. We asked CPA Michael Batts, a senior editorial advisor for ChurchLawAndTax.com, about adequate levels of cash reserves, plus a couple of questions about demonstrating the need for reserves to senior church leadership.

Is it a good idea to have cash reserves?

Generally, yes. Part of good stewardship is planning for the future. Consider the story of Joseph and planning for the famine. And consider that Malachi describes bringing the tithes into the “storehouse.”

From an operational perspective, maintaining reasonable cash reserves represents good stewardship by allowing a church to be prepared for contingencies, such as unexpected large repair bills, a sudden and unexpected downturn in revenues, or other unexpected events. For a church with outstanding debt, cash reserves can be critically important in the event of significant unexpected expenses or revenue downturns.

So how much should a church have in cash reserves?

There is no real right answer to that question. Some people suggest three to six months of operating expenses as a rule of thumb. And it’s not a bad rule of thumb.

For a church with significant long-term debt outstanding, I generally recommend that the church have at least one year’s worth of debt payments in reserve. Such a “debt service reserve” can provide the church with critical breathing room in the event of an unexpected cost or revenue downturn. Without a debt service reserve, such an event could cause immediate default.

As a side note, churches should be cautious about reserves when negotiating bank loans. As a condition of a loan, banks sometimes will require the church to maintain, at all times, a debt reserve fund of a certain minimum amount. While that may seem reasonable at first, the reality is that if a church needs to use the reserve for its intended purpose—making payments during a time of tight cash flow—then spending it down below a required minimum level will become an event of default.

My church has no reserves, and our leadership doesn’t seem to appreciate the need for them. How can I help them see the need?

That can be a tough challenge, depending on the dynamics of the leadership. But I have found it helps to start by focusing on something called “depreciation expense.”

Depreciation expense is a noncash expense that attempts to measure the deterioration or use of an asset. Assume, for example, that a church has a $5 million sanctuary building, and the structure has a useful life as is of 35 years. If you take the $5 million cost and divide it by 35 years, you get a depreciation expense of about $143,000 per year.

Now let’s assume that same church has various items of furniture, computers, and other equipment costing $700,000, with an average expected useful life of 5 years. That’s another $140,000 per year in depreciation. When most churches prepare their annual budgets, they budget only cash expenditures, and they don’t include noncash expenses like depreciation.

In this example, the church has a real, economic expense each year of more than $280,000. If the church were to include depreciation in its budget, something else would likely have to be cut to make the budget “balance.”

If you can help your leaders understand this one economic principle, the result of funding depreciation would be to build a cash reserve for contingencies. In the example above, this reserve would be more than $280,000 per year.

There’s no way my church will cut enough expenses to fund depreciation and still balance the budget. Now what?

Show depreciation expenses in the budget anyway. Include it in your financial reports. Show that you are operating at a deficit. And fund whatever portion of it you can. Seeing the deficit in the financial reports can help church leaders see the need, and, over time, perhaps make progress toward the goal. You don’t have to get from Point A to Point B overnight.

Michael (Mike) E. Batts is a CPA and the managing partner of Batts Morrison Wales & Lee, P.A., an accounting firm dedicated exclusively to serving nonprofit organizations across the United States.

Hosting a Music Group at Church: Legal and Clergy Tax Considerations

Don’t allow any performances until your sought guidance from a competent tax adviser.

Last Reviewed: January 24, 2025

Q: I’m a pastor of a local church and have some questions about groups and individuals that come to the church to do musical performances. I’d like to know what our requirements are as a church regarding the legal and tax requirements.


Churches often host music groups or individual performers for special events, raising questions about legal and tax obligations. Below, we address key considerations for churches when organizing such events.

Can We Collect an Offering to Offset Expenses?

Yes, churches may collect offerings to offset expenses such as travel, meals, and other performance-related costs. However, it is important to document the purpose of the offering and ensure it complies with the church’s tax-exempt status.

What Are the Rules for Collecting Offerings?

You can collect offerings in various ways, such as passing a collection plate, accepting contributions at the door, or using online donation platforms. Ensure transparency regarding the purpose of the offering.

Can We Sell Tickets to the Performance?

Yes, churches may sell tickets to performances, but this may trigger unrelated business income tax (UBIT) if the event is not directly related to the church’s religious mission. Consult a tax professional for guidance on UBIT implications.

What Should We Call the Offering?

It is acceptable to call the offering a “love offering” or “suggested donation,” but the terminology should not mislead donors. Clearly communicate whether the offering is tax-deductible or used to support specific expenses.

Do We Need to Issue Receipts or Tax Forms to Performers?

If performers are compensated with part or all of the offering, you may need to issue IRS Form 1099-NEC if payments exceed $600 for the year. Verify the tax status of the performers and maintain proper documentation.

Should We Explain the Purpose of the Offering?

Yes, explaining the offering’s purpose ensures transparency and compliance. Clearly state whether the funds will offset costs or support a specific initiative, and document this for recordkeeping.

Key Questions to Address Before Hosting

  • Is the music group recognized as tax-exempt or a taxable entity?
  • Is the church providing only the venue, or is it a church-sponsored event?
  • Does the event align with the church’s religious mission?
  • Is there a written agreement detailing the terms of the event?

Churches must avoid practices that jeopardize their tax-exempt status. For example:

  • Avoid agreements to pass all collected offerings to performers without oversight.
  • Limit compensation to reasonable amounts and document expenses.
  • Ensure events comply with IRS guidelines for tax-exempt organizations.

For further guidance on love offerings and tax compliance, consult the Church & Clergy Tax Guide.

FAQ Section

1. Can the church keep a portion of the offering for expenses?

Yes, churches can allocate a portion of the offering to cover event-related costs, but this must be communicated to donors.

2. Are ticket sales always taxable?

Ticket sales may be subject to UBIT if the event is not directly related to the church’s mission. Seek professional advice to determine tax implications.

3. What if the performers are volunteers?

Volunteers who receive no compensation do not require tax reporting. However, reimbursed expenses may still need documentation.

4. Can the church promote the event on social media?

Yes, but ensure promotional materials align with the church’s mission and clarify any ticketing or donation procedures.

The editorial team of Church Law & Tax is made up of Matthew Branaugh, attorney-at-law, and Rick Spruill, digital content manager.

Overseas Missions in Your Church: Legal and Tax Considerations

Video: The legal issues your church needs to consider when it ministers overseas.

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Frank Sommerville is a both a CPA and attorney, and a longtime Editorial Advisor for Church Law & Tax.

Do Churches Report Gifts on W-2 Forms?

Are gift certificates to church staff taxable?

Last Reviewed: February 4, 2025

Q: We provide every employee with a gift certificate of $20 on his or her birthday that can be used at a nearby restaurant. We have always assumed that these gifts are not taxable income, and so we have not included them on employees’ W-2 forms at the end of the year. But a few staff members insist that this is a taxable fringe benefit. Who is correct?


In general, a de minimis benefit is one for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical. De minimis benefits are excluded from tax under section 132(a)(4) of the tax code and include:

  • Occasional employee use of photocopier
  • Occasional snacks, coffee, doughnuts, etc.
  • Holiday gifts
  • Occasional meal money or transportation expense for working overtime
  • Flowers, fruit, books, etc., provided under special circumstances
  • Personal use of a cell phone provided by an employer primarily for business purposes

In determining whether a benefit is de minimis, you should always consider its frequency and value. An essential element of a de minimis benefit is that it is occasional or unusual in frequency. It also must not be a form of disguised compensation.

Whether an item or service is de minimis depends on all the facts and circumstances. In addition, if a benefit is too large to be considered de minimis, the entire value of the benefit is taxable to the employee, not just the excess over a designated de minimis amount. The IRS has ruled previously in a particular case that items with a value exceeding $100 could not be considered de minimis, even under unusual circumstances.

Cash cannot be a de minimis fringe benefit since accounting for it is never unreasonable or impractical. An exception is provided for occasional meal or transportation money to enable an employee to work overtime. The benefit must be provided so that the employee can work an unusual, extended schedule. The benefit is not excludable for any regularly scheduled hours, even if they include overtime. The employee must actually work the overtime. Meal money calculated on the basis of number of hours worked is not de minimis and is taxable wages.

Gift certificates that are redeemable for general merchandise or have a cash equivalent value are not a de minimis benefit and are taxable. But the IRS maintains that “a certificate that allows an employee to receive a specific item of personal property that is minimal in value, provided infrequently, and is administratively impractical to account for, may be excludable as a de minimis benefit, depending on facts and circumstances.”

If a benefit qualifies for exclusion, no reporting is necessary. If it is taxable, it should be included in wages on Form W-2 and is subject to income tax withholding (unless exempt, as in the case of a minister who has not elected voluntary withholding). If the employees are covered for Social Security and Medicare, the value of the benefits is also subject to withholding for these taxes. Again, this is not true for ministers with respect to compensation received from the exercise of ministry. As to such services, ministers are self-employed for Social Security and pay the self-employment tax.

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Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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Is Donated Parking Space for Churches Tax Deductible?

Understand the rules for tax-deductibility of donated parking spaces for churches and the correct method to document contributions.

Last Reviewed: January 17, 2025

Q: A church member allows us to park our buses at his business. We used to pay $200 a month for this service. In the past, we have given this church member a letter indicating a donation of $2,400 per year, which he could use as a charitable contribution. Our question is, “What is the proper method to handle this?”


Are Donated Services Tax Deductible?

The IRS does not allow the deduction of donated services as a charitable contribution, even if they provide significant value to the recipient. In this case, the use of parking spaces falls under the category of donated services. As a result, the church member cannot claim a tax deduction for the parking space offered to the church.

How Should Churches Acknowledge Donated Services?

While the donation of services is not tax deductible, churches can express their gratitude in other ways:

  • Provide a thank-you letter acknowledging the contribution of parking space.
  • Avoid stating any monetary value or suggesting it qualifies as a charitable deduction.

What Should the Thank-You Letter Include?

The thank-you letter should follow these guidelines:

  • Express gratitude for the use of the parking space.
  • Acknowledge the church member’s generosity without assigning a dollar amount.
  • Clarify that no goods or services were exchanged for the contribution.

Why Is This Important?

Providing clear documentation helps avoid any misunderstandings about the tax deductibility of services. It also ensures the church operates within IRS guidelines for charitable contributions.

Learn More About Charitable Contributions

For additional information about charitable contributions and compliance, see Chapter 8 of Richard Hammar’s Church & Clergy Tax Guide.

FAQ: Donated Parking Space

Can the donor receive any form of compensation? Any compensation provided would disqualify the act as a donation and may create taxable income for the donor.

Can services be claimed as a tax deduction? No, donated services, including the use of parking spaces, are not tax deductible.

What if the donor estimates a fair market value? Even with an estimate, services cannot be deducted as charitable contributions under IRS rules.

Should the church issue a receipt for donated services? No, instead, issue a thank-you letter without assigning monetary value.

The editorial team of Church Law & Tax is made up of Matthew Branaugh, attorney-at-law, and Rick Spruill, digital content manager.

How You Describe Your Church May Affect Tax Exemption

Learn how describing your church in business terms may affect its tax exemption status.

Last Reviewed: January 9, 2025

Business-savvy church leaders sometimes use business jargon to describe their activities and efforts. A recent IRS denial of exemption for a nonprofit religious organization highlights why this practice can be problematic.

IRS Denial Based on Business Jargon

In a denial letter released on March 8, 2013, the IRS addressed a 501(c)(3) exemption application by a religious organization. The organization described itself as having three divisions: a Ministry Division, a Consulting Division, and a Merchandising Division. While these activities are common among religious nonprofits, the terminology used raised concerns.

The IRS noted frequent use of business jargon, including terms like “divisions,” “branches,” and “brands.” The following excerpt from the ruling illustrates the issue:

“In addition to your frequent references to Taxpayer, Church, and Website as ‘brands,’ you described the majority of your activities in the context of business models, supply chains, marketing strategies, and other, typically business-oriented approaches.”

Understanding the Commerciality Doctrine

The IRS and courts apply a “commerciality doctrine” to determine whether nonprofit organizations qualify for 501(c)(3) exemption. While not explicitly defined in the tax code, this doctrine assesses whether revenue-generating activities are overly commercial, potentially undermining an organization’s exempt purpose.

Using business jargon may give the impression that an organization operates in a commercial capacity, which could affect its exemption eligibility. Though semantics alone aren’t grounds for exemption denial, excessive use of business terms can create unnecessary challenges.

Best Practices for Churches

  • Use mission-focused language: Ensure your descriptions highlight religious or nonprofit purposes rather than commercial operations.
  • Exercise caution with terminology: Avoid terms like “brands,” “supply chains,” or “marketing strategies” unless absolutely necessary.
  • Review your documentation: Audit your bylaws, applications, and public materials to ensure alignment with nonprofit standards.
  • Seek professional advice: Consult with a tax professional to evaluate language and practices that may raise concerns with the IRS or other authorities.

Why Terminology Matters

Excessive business terminology doesn’t align with the core principles of nonprofit organizations. It may inadvertently signal to tax authorities that the organization’s purpose is commercial rather than charitable or religious. While terminology alone won’t result in exemption denial, it can influence IRS evaluations.

Conclusion

Churches and nonprofit organizations should carefully evaluate their use of business jargon to avoid creating the impression of commercial intent. By focusing on mission-driven language, churches can reduce risks and maintain compliance with tax-exempt standards.

FAQs

1. What is the commerciality doctrine?

The commerciality doctrine evaluates whether revenue-generating activities by nonprofits are conducted in a highly commercial manner, potentially undermining their exempt purpose.

2. Can business jargon alone lead to tax exemption denial?

No, semantics alone won’t result in denial. However, excessive use of business terms can influence IRS evaluations and create unnecessary challenges.

3. How can churches avoid IRS concerns about terminology?

Focus on mission-driven language, avoid excessive business jargon, and ensure all documentation reflects nonprofit purposes.

4. Should churches consult a tax professional for guidance?

Yes, consulting a tax professional can help churches evaluate their language, practices, and compliance with IRS standards.

Michael (Mike) E. Batts is a CPA and the managing partner of Batts Morrison Wales & Lee, P.A., an accounting firm dedicated exclusively to serving nonprofit organizations across the United States.

Neglecting to “Render Unto Caesar”

Discover essential steps for clergy tax filing, including estimated payments and how to avoid penalties for noncompliance.

Last Reviewed: January 9, 2025

Ministers—especially new ones—often fail to file income tax returns. This common problem arises because churches are not required to withhold income taxes or Social Security taxes from the wages of ministers performing ministerial services. There are two primary reasons for this:

  • Ministers are classified as self-employed for Social Security purposes, meaning they pay self-employment tax instead of having Social Security and Medicare taxes withheld.
  • The tax code exempts ministers’ wages from income tax withholding unless voluntary withholding is elected.

Key Takeaways:

  • Ministers must prepay federal income and self-employment taxes quarterly using the estimated tax procedure.
  • Failure to file tax returns or pay taxes can lead to penalties, interest, and long-term consequences.
  • Church leaders should educate ministers about their tax filing obligations.

Ministers are required to prepay federal income taxes and self-employment taxes using the estimated tax procedure. This means estimating their tax liability for the year and paying one-fourth of the amount quarterly. However, many seminaries fail to inform students of this obligation, leading to misunderstandings.

Common Issues for New Ministers

New ministers often assume their church will handle tax withholdings like a secular employer. When this doesn’t happen, they may rationalize not filing taxes, mistakenly believing:

  • Ministers are exempt from taxes.
  • Their earnings are too low to require withholding or filing.

This can result in nonpayment of taxes and failure to file tax returns. In time, many realize they owe back taxes but are unsure how to proceed.

Steps to Address Unfiled Tax Returns

Ministers who have failed to file one or more tax returns should take the following steps:

  • Consult a CPA or tax attorney to determine outstanding tax obligations and available options.
  • Understand potential penalties, including:
    • Failure-to-file penalty: Applies if returns are not filed by the due date (including extensions), unless reasonable cause exists.
    • Failure-to-pay penalty: Applies if taxes are not paid in full by the due date.
    • Interest: Charged on unpaid taxes and penalties.
  • Explore options for financial relief, such as installment agreements or offers in compromise, with your tax advisor.

Note: There is no penalty for failing to file if you are due a refund, but refund claims must be made within three years of the return’s due date.

Understanding Tax Filing Deadlines

The IRS enforces strict deadlines for tax filings:

  • Refunds cannot be claimed after three years from the return’s original due date.
  • The statute of limitations for the IRS to assess and collect taxes does not begin until a return is filed. Without filing, there is no limitation period.

Ministers who delay filing risk losing refunds and facing indefinite tax liabilities.

How Church Leaders Can Help

Church leaders play a crucial role in helping ministers meet their tax obligations. They should:

  • Discuss tax filing requirements with every new minister, especially recent seminary graduates.
  • Ask specific questions, such as, “How do you plan to pay your income and self-employment taxes? Through voluntary withholding or the estimated tax procedure?”
  • Provide IRS Form 1040-ES and instructions to help ministers calculate and pay estimated taxes.

Educating ministers about their tax responsibilities reduces the likelihood of noncompliance and financial stress.

FAQs

  • What are estimated taxes?
    Estimated taxes are quarterly payments that cover self-employment and income tax obligations not withheld by an employer.
  • Can ministers elect voluntary tax withholding?
    Yes, ministers can arrange for voluntary withholding through their church, though this is uncommon.
  • What happens if a minister does not file taxes?
    Failure to file or pay taxes can lead to penalties, interest, and, in extreme cases, legal action.
  • How can churches assist ministers with taxes?
    Churches can educate ministers about their obligations and provide resources like IRS Form 1040-ES to simplify the process.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Records Retention for Churches: Consent Forms and Screening Records

Churches must be ready to document its due diligence dating back decades ago.

Last Reviewed: February 11, 2025

Q: Our insurance company says we only have to keep parental consent forms for church activities and outings for three years, but someone else told us the forms need to be kept until the child turns 18 years of age, for sexual abuse purposes.

Which is true? Is there specific wording that should be included in the permission forms for this purpose? We do background checks and give safety and abuse awareness classes to all our children’s workers and teen workers. Does that alone release us from responsibility since we have done all that is reasonable to protect our children?


If a church is sued for a case of child molestation that occurred during an off-site, overnight activity, the fact that the parents of the victim signed a parental consent form allowing their child to attend the event would be of little, if any, evidentiary value in a lawsuit.

Reduce the risk of abuse with the Church Law & Tax child sexual abuse awareness program.

Parental consent forms, in general, should be retained until a minor child reaches age 18 plus the applicable statute of limitations for personal injury claims under state law.

You say your church conducts background checks and gives training classes. This work is important. It probably also requires the collection of forms and records about volunteer workers.

I’m often asked how long to keep those records, but there is no legal requirement.

But, if your church is sued for child molestation by a youth worker, you are going to want to prove due diligence in properly screening the accused worker before allowing them to work in the youth ministry.

The best way to do this is with application forms and references.

Keep in mind that the statute of limitations for child abuse claims can last for decades, and so the “best practice” is to keep these forms, as well as your liability insurance policies, permanently. Imagine being sued today for an alleged incident of child abuse occurring 25 years ago? How are you going to rebut a claim of negligent selection if you cannot establish what you did to vet the perpetrator?

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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