We are looking at a cost split for preaching resources sold in our church’s gift shop. The arrangement is a 50/50 split between the pastor and the store. What is the proper way to account for the pastor’s portion of that income? The pastor has a 501(c)(3) organization for his book-selling activities, and the funds would be transferred to him through that account. How should this be handled to remain compliant with tax regulations regarding taxes on pastor’s products?
Should the Church Purchase Directly from the Pastor?
While it may seem straightforward to purchase directly from the pastor, it is better to structure the transaction through the pastor’s 501(c)(3) organization. This method avoids potential conflicts of interest and ensures the church maintains proper accounting practices. Board approval is essential since this constitutes a related-party transaction, and transparency is critical.
What Steps Should Be Taken to Ensure Compliance?
1. Obtain Board Approval
As this involves a related-party transaction, the church’s board should approve the arrangement. Documenting the approval demonstrates transparency and ensures alignment with governance standards.
2. Purchase at Fair Market Value
Ensure the resources are purchased from the 501(c)(3) at fair market value. Paying an unreasonable amount could raise concerns with the IRS and potentially jeopardize the church’s tax-exempt status.
3. Use the Church’s Inventory and Cost of Goods Sold Accounts
When resources are purchased from the 501(c)(3), the transaction is recorded as an increase in inventory. The cost of goods sold account reflects the expense when the resources are sold. This approach avoids any direct financial transaction with the pastor while maintaining proper accounting practices.
4. Let the Pastor Handle Royalties
The pastor can establish a royalty arrangement with the 501(c)(3). This ensures that any income from book sales is managed appropriately within the organization, keeping personal and organizational finances separate.
FAQs: Taxes on Pastor’s Products
1. Can the church buy preaching resources directly from the pastor?
It’s better to purchase from the pastor’s 501(c)(3) organization to avoid potential tax and governance issues. This approach keeps transactions transparent.
2. Why is board approval necessary for this transaction?
Board approval is required for related-party transactions to ensure transparency and compliance with governance best practices.
3. How should the church record these purchases?
The purchases should be recorded as inventory, with sales tracked through the cost of goods sold account. This keeps the church’s financial records accurate.
4. Does the pastor owe taxes on income from these sales?
If the income flows through the pastor’s 501(c)(3), it is managed by the organization and not considered personal income. However, the pastor should consult a tax advisor for specific guidance.
By structuring transactions properly and adhering to tax laws, churches can avoid complications when handling taxes on pastor’s products. Consulting with legal and tax professionals ensures compliance and transparency.