Background. Congress enacted two major tax laws in August—the Taxpayer Relief Act and the Balanced Budget Act. Together, these laws amend over 800 sections of the Internal Revenue Code (our federal tax law), and add more than 300 new sections. We have fully reviewed the new laws, and are summarizing in this article those provisions of most relevance to church treasurers.
1. Delay in penalty for failure to deposit payroll taxes electronically. In 1993 Congress enacted legislation requiring the IRS to develop a system for the electronic filing of payroll taxes. Congress wanted a simple, “paperless” way for employers to deposit their payroll taxes. In response the IRS came up with the Electronic Federal Tax Payment System (or EFTPS). The new electronic system is phased in over a period of years by increasing the percentage of total taxes subject to the new EFTPS system each year. For 1997, the target percentage was to be achieved by requiring all employers that deposited more than $50,000 in payroll taxes in 1995 to begin using EFTPS by January 1, 1997. Congress later postponed this deadline until July 1, 1997, and the IRS announced earlier this year that it would not impose penalties for noncompliance through the end of 1997—for employers that make timely deposits using paper forms while converting over to the EFTPS system. The recent Taxpayer Relief Act provides that no penalties will be assessed for failure to use the EFTPS system to deposit payroll taxes prior to July 1, 1998.
Key point. If you had a federal payroll tax obligation of more than $50,000 for 1995, you must use the EFTPS system to deposit payroll taxes not later than July 1, 1998. There are no exceptions for churches or other religious or charitable organizations. Failure to comply may result in a 10 percent penalty.
Example. A church had 2 ministers and 4 nonminister employees in 1995. The ministers were treated as employees, but did not elect voluntary withholding of their federal income taxes. The church had a federal payroll tax obligation of $20,000. It does not have to begin using the EFTPS system to deposit payroll taxes in 1998.
Example. A church had 3 ministers and 8 nonminister employees in 1995. The ministers were treated as employees, and elected voluntary withholding of payroll taxes. The church had a federal payroll tax obligation of $55,000. It must begin using the EFTPS program to deposit payroll taxes no later than July 1, 1998.
Key point. For further information on how to comply with the EFTPS requirements, see the May 1997 issue of this newsletter.
2. Increase in charitable mileage rate. Church members often ask if they can deduct transportation expenses incurred in performing services on behalf of the church. For example, a church member uses her car to visit other members in the hospital. Or, a member uses his car to visit new members. Are these expenses deductible as a charitable contribution, and if so, how is the contribution computed? Church treasurers should be able to respond to such questions.
The income tax regulations specify that “out-of-pocket transportation expenses necessarily incurred in performing donated services are deductible” as charitable contributions. The IRS permits taxpayers to deduct either their actual transportation costs incurred in performing charitable work, or a standard mileage rate that has been 12 cents per mile since 1984.
The Taxpayer Relief Act increases the charitable standard mileage rate to 14 cents per mile for miles driven on or after January 1, 1998. The new rate is not indexed for inflation.
Key point. Church members can continue to deduct the actual cost of using a vehicle to perform charitable services instead of using the charitable standard mileage rate. IRS Publication 526 (“Charitable Contributions”) states that “you may deduct unreimbursed out of pocket expenses, such as the cost of gas and oil, that are directly related to the use of your car in giving services to a charitable organization. You may not deduct general repair and maintenance expenses, depreciation, or insurance …. You may deduct parking fees and tolls, whether you use your actual expenses or the standard rate.”
3. Corporate sponsorship payments. Many churches produce pictorial directories of members, and sponsor concerts or other events. In some cases, churches seek financing for these projects from local businesses. For a fee, a business can have its name appear as a sponsor in the pictorial directory, or in a printed program distributed at the concert or other event. Are these fees subject to the federal unrelated business income tax (UBIT)? The recent Taxpayer Relief Act addresses this issue directly. Here are the new rules:
- “Qualified sponsorship payments” received by a church or other charity will not be subject to UBIT. A qualified sponsorship payment is defined as a payment made by a business to a charity in exchange for the use of the business’s name or logo by the charity.
- This exception will not apply to any payment which entitles a company to advertise its name or logo “in regularly scheduled and printed material” published by the charity—unless “related to and primarily distributed in connection with a specific event conducted by” the charity.
Key point. This provision applies to payments made or received on or after January 1, 1998.
Example. A church is planning a pictorial directory of its membership. It informs the congregation that any business that contributes $1,000 to the project will have its name listed as a sponsor at the end of the directory. This acknowledgement does not subject the financial support to UBIT.
Example. Same facts as the previous example, except that the congregation is informed that any business contributing at least $1,000 to the project will be able to publish an ad at the end of the directory. Income received by the church under this arrangement probably will be subject to UBIT, since the ads will not be “related to and primarily distributed in connection with a specific event conducted by” the church.
Example. A church is planning a public concert with a famous musician. To raise funds for the event, it allows local businesses to pay a fee in return for an ad in the printed program that will be distributed to each person attending the concert. The church receives payments from three local music companies. Income received by the church under this arrangement probably will not be subject to UBIT, since the ads are “related to and primarily distributed in connection with a specific event conducted by” the church.
4. Eliminate gift tax filing requirements for gifts to charity. Persons who donate more than $10,000 to any one person or organization in the same year are required to file a federal gift tax return with the IRS. Gifts to churches and other charities are exempted from this requirement. The Taxpayer Relief Act clarifies that this exemption applies only to gifts of a donor’s entire interest in property to the church or charity. It does not apply to a gift of a partial interest in property. This provision applies to gifts made after August 5, 1997.
Example. John contributes $15,000 in cash to his church in 1997. He is not required to file a gift tax return with the IRS, because he has made a gift of his entire interest in the funds to his church.
Example. Joan gives her home to her church in December of 1997. She is not required to file a gift tax return with the IRS, even though the home is worth more than $10,000, because she gave her entire interest in the property to the church.
Example. Same facts as the previous example, except that Joan reserved a “life estate” in the home, which permits her to remain in the home for the rest of her life. Joan must file a gift tax return with the IRS, since she made only a partial gift of her property to the church.
Example. Jack gives ten acres of land to a church in 1998. The deed provides that if the property ever ceases to be used for church purposes, then title will revert back to Jack or his heirs. Jack has retained a partial interest in the property (since title may revert to him or his heirs in the future). Jack’s interest is known as a “possibility of reverter.”
Key point. It is common for churches to receive gifts of partial interests in property. Church treasurers should be ready to advise these donors of their obligation to file a federal gift tax return. The form can be obtained by calling the IRS at 1-800-TAX-FORM.
5. Contributions on behalf of self-employed ministers to church retirement plans. The Taxpayer Relief Act provides that in the case of contributions made on behalf of a minister who is self-employed to a church plan, the contribution is nontaxable to the extent that it would be if the minister were an employee of a church and the contribution were made to the plan. This provision takes effect in 1998.
6. Church plan exception to group health coverage. Legislation enacted in 1996 prohibits group health plans from excluding an employee on account of his or her health or medical condition. The Taxpayer Relief Act provides that church plans do not violate this nondiscrimination requirement merely because the plan requires evidence of good health in order for an individual to enroll in the plan. However, this exception only applies with respect to individuals (1) who are employees of an employer with 10 or fewer employees, or self-employed, or (2) who enroll after the first 90 days of eligibility under the plan. Further, this exception applies to a church for a particular year only if the health plan required evidence of good health as of July 15, 1997, and at all times thereafter.
7. Religious schools exempt from federal unemployment tax. Since 1970, all work performed for nonprofit organizations is subject to federal unemployment tax and must be covered by state unemployment law, unless specifically exempted by law. Exemptions have included work performed for a church (or convention or association of churches), or an organization “which is operated primarily for religious purposes and which is operated, supervised, controlled, or principally supported by a church or convention or association of churches.” The recent Balanced Budget Act expands this list of exceptions to include work performed in an elementary or secondary school that is operated primarily for religious purposes, even if it is not operated, supervised, controlled, or principally supported by a church or a convention or association of churches.
Key point. Some churches that operate private schools have separately incorporated them in order to reduce the church’s risk of liability. Unfortunately, separate incorporation will have little effect on the church’s liability for the obligations of the school—unless the church relinquishes control of the school. If a church is willing to relinquish control, then the school becomes largely independent. This has a number of consequences, including the following: (1) liability of the church is reduced; and (2) employees of the school are not covered by federal or state unemployment law in most states.
8. New W-4s. The recent Taxpayer Relief Act does what its title suggests—it provides significant tax relief to many taxpayers. The biggest winners are lower and middle income taxpayers. As a result, many church staff members will be paying less taxes in 1998. Church treasurers should encourage all staff members to consider filing new and updated W-4 forms for 1998—to reduce their income tax withholdings.
Key point. This is especially true for staff members with more than one minor child. These employees will be eligible for a $400 per child tax credit in 1998 ($500 in 1999). The effect of a credit is a dollar-for-dollar reduction in income taxes—which is far more advantageous than a deduction or exclusion. These employees will see a significant reduction in their income tax liability.
This article originally appeared in Church Treasurer Alert, October 1997.