The Church And I.R.S .

1. The Church And I.R.S. Presented by Rev. Dr. Robert L. Peoples WINSTON SALEM GREENVILLE DISTRICT CLEVELAND STATE UNIVERSITY SHELBYVILLE NORTH CAROLINA CHRISTIAN METHODIST EPISCOPAL CHURCH, INCPRESIDING ELDER DR. JAMES RUSSELL BISHOP THOMAS HOYT JR.

2. Introduction In view of the unique relationship between the United States Government and the religious community, Congress has provided special tax rules to certain religious groups

3. Definitions The words “church” and “minister” are not used by all faiths. To make this presentation understandable, the terms “Church” and “minister” are used. The rules contained in this publication come from the Internal Revenue Code, the Income Tax Regulations, court decisions, and the IRS interpretation of the Code, regulations, and court decisions.

4. Section 501 (c) (3) This section of the Internal Revenue Code describes charitable organizations, including churches and other religious organizations that qualify for exemption from federal income tax and are eligible to receive tax-deductible contributions.

5. Section 501 (c) (3) Section 501 (c) (3) provides that an organization must be organized and operated exclusively for religious or other charitable purposes. Section 501 (c) (3) Organization: This term refers to any organization, including a church or other religious organization, that is tax exempt because it meets the requirements of 501(c ) (3).

6. Minister A minister is an individual who is duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. A minister is considered to be a religious leader by his or her church or denomination.

7. Minister A minister has the authority to conduct religious worship, perform sacerdotal, functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination. Generally, an individual who is a minister of music or education is not considered to be a minister for federal tax purposes.

8. Integrated Auxiliary Of A Church Refers to a class of organizations that are related to a church or convention or association of churches but are not such organizations themselves. The IRS will treat as an integrated auxiliary of a church any organization that meets two tests: 1) affiliation with a church or convention or association of churches, and 2) financial support primarily from internal church sources as opposed to public or governmental sources.

9. Church The term "church" is not specifically defined in the Internal Revenue Code. However, because special tax rules apply to churches, it is important to distinguish churches from other religious organizations. Certain characteristics are generally attributed to churches. These attributes have been developed by IRS and by court decision. They include:

10. Church a) A distinct legal existence b) A recognized creed and form of worship c) A definite and distinct ecclesiastical government d) A formal code of doctrine and discipline e) A distinct religious history f) A membership not associated with any other church or denomination

11. Church g) An organization of ordained ministers h) Ordained ministers selected after completing prescribed courses of study I) A literature of its own j) Established places of worship k) Regular congregations 1) Regular religious services m) "Sunday schools" for the religious instruction of the young n) Schools for the preparation of its ministers

12. Recognition By The IRS That The Church Is Tax-Exempt Does a church have to contact the Internal Revenue Service in order to be exempt from income taxes? No Is there any reason why a church would contact the IRS for formal recognition of the church as tax-exempt? Yes

13. Recognition By The IRS That The Church Is Tax-Exempt What if the church has a parent that is tax-exempt? A church or other organization may wish to contact the parent to see if the parent has a “group exemption letter.” Does a religious organization other than a church have to apply for recognition that it is tax-exempt? Yes

14. Recognition By The IRS That The Church Is Tax-Exempt What notice does The service provide when it has found an organization to be tax-exempt? Organizations that file Form 1023 and satisfy all requirements of section 501(c)(3) will be notified in writing of their status, any requirement to file an annual information return (see below), and of eligibility to receive deductible. contributions.

15. Recognition By The IRS That The Church Is Tax-Exempt Generally, a letter from the IRS is the only evidence provided to the organization as to the organizations exempt status. Is there A cost To An organization that applies For exemption? Yes.The IRS is required to collect a fee from any organization seeking a determination of its tax-exempt status under the Internal Revenue Code.

16. Restrictions That Apply If A Church Is To Remain Tax-Exempt Under Section 501 (c) (3) All organizations that are exempt under Section 501 (c)(3), including churches, must be engaged in activities that further exclusively public purposes, rather than private interests. The organization must not be operated for the benefit of designated individuals or the persons who created them.

17. Restrictions That Apply If A Church Is To Remain Tax-Exempt Under Section 501 (c) (3) What is prohibited inurement? What is prohibited private benefit? What are the restrictions on legislative activity that may be engaged in by churches?

18. Restrictions That Apply If A Church Is To Remain Tax-Exempt Under Section 501 (c) (3) What constitutes “attempting to influence legislation”? What constitutes “legislation”? May a church use other than the “substantial part” test?

19. Restrictions That Apply If A Church Is To Remain Tax-Exempt Under Section 501 (c) (3) What are the consequences that result from excessive legislative activity? An organization that continues to lobby on an excessive basis may lose its tax exemption under section 501 c (3).

20. Restrictions That Apply If A Church Is To Remain Tax-Exempt Under Section 501 (c) (3) If an organization loses its status as a tax-exempt charitable organization because it engages in excessive legislative activity, it may not thereafter qualify for exemption as a social welfare organization under section 501(c)(4).

21. Restrictions That Apply If A Church Is To Remain Tax-Exempt Under Section 501 (c) (3) What are the Restrictions on Political Activity that may be engaged in by Churches? All section 501(c)(3) organizations, including churches, their integrated auxiliaries, conventions or associations of churches, are prohibited from participating in, or intervening in (including the publication or distribution of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. Violation of this prohibition results in denial or revocation of exempt status and the imposition of certain excise taxes.

22. Restrictions That Apply If A Church Is To Remain Tax-Exempt Under Section 501 (c) (3) What constitutes prohibited political activity? Whether a particular activity, action, or expenditure constitutes the conduct of prohibited political activity depends on all the facts and circumstances. For example, certain voter education activities (including the presentation of public forums and the publication of voter. education guides) conducted in a non-partisan manner may not constitute prohibited political activity, while other so-called voter education activities may.

23. Restrictions That Apply If A Church Is To Remain Tax-Exempt Under Section 501 (c) (3) Contributions to political campaign funds, public statements of position (verbal and written) in favor of or in opposition to candidates for office, or provision of a forum for expression of candidates' views on a partisan basis, however, would clearly violate the prohibition against political activity.

24. Restrictions That Apply If A Church Is To Remain Tax-Exempt Under Section 501 (c) (3) Ministers and others who commonly speak or write on behalf of religious organizations should clearly indicate, at the time they do so, that public comments made by them in connection with political campaigns are strictly personal and are not intended to represent their organization.

25. Restrictions That Apply If A Church Is To Remain Tax-Exempt Under Section 501 (c) (3) Partisan comments by the employees or other representatives of an organization regarding political candidates must be avoided in official organization publications and at official church functions.

26. Excise Tax An initial tax is imposed on the organization at the rate of 10% of the political expenditures. Also, a tax at the rate of 2.5% of the expenditures is imposed against the organization's managers (jointly and severally) who, without reasonable cause, agreed to the expenditures knowing they were political expenditures. The tax on management may not exceed $5,000.

27. Excise Tax In any case in which an initial tax is imposed against an organization, and the expenditures are not corrected within the period allowed by law, an additional tax equal to 100% of the expenditures is imposed against the organization. In that case, an additional tax is also imposed against the organization's managers jointly and severally) who refused to agree to make the correction.

28. Correction Correction of a political expenditure requires the recovery of the expenditure, to the extent possible, and establishment of safeguards to prevent future political expenditures. Possible Injunction:Where a section 501(c)(3) organization has flagrantly participated in a political campaign, the IRS may go to court for an injunction to prevent further abuse and to ensure that the organization's funds are preserved for charitable purposes. In that case, an additional tax is also imposed against the organization's managers jointly and severally) who refused to agree to make the correction.

29. Is A Church Subject To Tax On Any Income From An Activity Unrelated To Its Exempt Purposes That Constitutes A Trade Or Business? Yes. Churches, like other tax-exempt organizations, may engage in income producing activities unrelated to their tax-exempt purposes. However, the net income from such activities may be subject to unrelated business income tax.

30. Is A Church Subject To Tax On Any Income From An Activity Unrelated To Its Exempt Purposes That Constitutes A Trade Or Business When is Income Subject To the Unrelated Business Income Tax? What Are Some Exceptions to the Taxation of Unrelated Trade or Business Income Examples of Unrelated Trades or Businesses

31. Special Rules Regarding Audits Special restrictions placed on the internal revenue service when it examines A church What organizations are covered under these special rules? Do the restrictions apply to all IRS inquiries to a church? Must a Church maintain books and records?

32. Special Rules Applicable To Compensation Of Clergy What rules apply to a Parsonage or Rental Allowance? Are there limitations on the amount that is deductible by a minister as to expenses allocable to tax free income? Yes Does the Parsonage allowance apply to home ownership? Yes How do you get further information? See Publications 517 and 525

33. Special Rules Applicable To Compensation Of Clergy What is the treatment of reimbursement payments to ministers and other church employees? What is an accountable plan? How are automobile expense reimbursements treated?

34. Church Responsibilities For Employment Taxes Are churches liable for employment taxes? When are churches and other religious organizations not liable for Social Security and Medicare taxes? How do you determine whether a worker is an employee?

35. Church Responsibilities For Employment Taxes What is the treatment of compensation paid to ministers for purposes of employment tax and income tax withholding? For additional information: See Publications 334, 939, and 517.

36. FundRaising Rules Are there special rule relating to fundraising and charitable contributions? Yes What are the new substantiation rules? What are “Quid Pro Quo contributions” and what new rules apply to such transactions?

37. Filing Requirements Does a church have to file an annual income tax return with the IRS? No Does a religious organization other than a church have to file an annual income tax return with the IRS?

38. Key Point The new regulation does not relieve churches of the duty of noting; on receipt that no goods or services were provided to donors who make on or more individual contribution of at least $250. If a charity provides a donor with no goods or services in connection with a contribution of $250 or more, the charity’s receipt must still say so. The new regulations simply permits charities to use this same rule when they provide such donors with goods or services of insubstantial. A charity provides only intangible religious benefits. What if a religious charity only provides intangible religious benefits in connection with a charitable contribution? Must the receipt say so? According to Mr. Rutstine, the answer is yes. Once again, the sole purpose of the new regulation was to permit charities that provide goods or services of insubstantial value in connection with a contribution of $250 or more, to say on the receipt issued to the donor that no goods or services were provided. The regulation had no effect on the requirement that is a church provides “intangible religious benefits” in connection with a contribution of $250 or more its receipt must say so.

39. FUNDS ACCOUNTABILITY The procedure for validating or authenticating all funds received on behalf of the church that will meet Internal Revenue Services regulations are as follows: (This information is for those who handle the church finances- re: Stewards of Finance Committee count the money) 1. Have a sign in roster which includes the names of those who are to count the Funds and a place for them to initial. 2. Have these persons use red pens to circle or note the date and the amount of The donation on each envelope before opening. 3. Upon opening the envelope, write in red ink whether it is cash or check and if It is a check verifies the check number. 4. If there is an error on the envelope notate the correct amount that is in the in Red and initial a second time or have a second person to initial. 5. Provide by mail a receipt of all contributions that are $250.00 or greater. 6. Be sure that treasurer receipt the stewards or finance committee for the Money. (The treasurer should not count the funds but simply deposit and let the receipt from the bank determine if there are any errors. This will keep the check and balance system in line and when the treasurer and recording steward meet to reconcile the bank statement as per the discipline, it will create a stronger check and balance.) 7. Be sure to bind all envelopes. Make envelopes for any persons who put in Checks without envelopes. Signify the envelope with a red initial. For all loose Monies make one envelope and call it Mr. or Ms. Miscellaneous use the same Name for every time you count fund and there are loose donation, which Cannot be attributed to any one person. 8. At the close of the fiscal year, distribute year-end receipts to church members (And other donors) so they may validate their contributions.

40. Contribution Forms Each member should receive a contribution form. It is believed that the best form is a small card that has the basic information preprinted on it and can be typed or hand written for each taxpayer. It requires three signatures: the Recording Steward (Financial secretary), treasurer and pastor. The pastor must sign as the Chief Executive Officer of the local church. Forms should be in the members’ hands by January 20th of each year, since this is the beginning of the tax-filing year. The ledger or computer printout should show their contributions as received; however the form will sum-up the amounts by category. (A copy of these forms will be shown at the end of this book.) Is a church subject to tax on any income form an activity that is unrelated to its exempt purposes and that constitutes a trade or business? Yes, churches, like other tax-exempt organizations, may engage in income producing activities unrelated to their tax-exempt purposes. However, the net income from such activities may be subject to unrelated business income tax. If a church or other exempt organization has gross receipts of $1,000 or more from the conduct of any unrelated trade or business, it is required to file Form 990-T, Exempt Organization Business Income Tax Return. The Form 99-T is due on the 15th of the fifth month following the end of the church’s tax year.

41. “Quid pro quo” “A quid pro quo contribution is a payment made to a charity by a donor as a contribution and/or for goods or services provided to the donor by the charity.”

42. Statements “Quid pro quo” donations must be accompanied by a disclosure statement. “A quid pro quo contribution is a payment made to a charity by a donor as a contribution and/or for goods or services provided to the donor by the charity.” The charitable organization must provide a written disclosure statement to donors of a quid pro quo contribution in excess of $75. For example, if a donor gives a charity $100 and receives a ticket to go on a bus trip which is valued at $40, the donor has made a quid pro quo contribution. In this example, the charitable contribution portion of the payment is $60. Even though the part of the payment available for deduction does not exceed $75, a disclosure statement must be filed because the donor's payment (quid pro quo contribution) exceeds $75 The required written disclosure statement must:

43. Statements 1. Inform the donor that the amount of the contribution that is deductible for Federal income tax purposes are limited to the excess of any money (and the value of any property other than money) contributed by the donor over the value of goods or services provided by the charity, and 2. Provide the donor with a good faith estimate of the value of the goods or services that the donor received. 

44. Statements Continued The church as all other charities must furnish the statement in connection with either the solicitation or the receipt of the quid pro quo contribution. This means that if the tickets you are selling furnished the disclosures so that the tickets provide the necessary disclosure information or statement in connection with a particular solicitation, it is not necessary for the organization to provide another statement when the associated contribution is actually received.

45. Filing Requirements No statement required when: 1. The goods or services given to a donor meet the standards for insubstantial value set out in Rev. Proc. 90-12, 1990-1 C.B. 471, and Rev. Proc. 92-49, 1992-1 C.B.987 (as updated); 2. There is no donation element involved in a particular transaction with a charity when one purchases an item from the church (for example, there is generally no donation element involved when a member purchases a tape after Sunday morning worship); or 3. There is only an intangible religious benefit provided to the donor. The intangible religious benefit must be provided to the donor by an organization organized exclusively for religious purposes, and must be of a type that generally is not sold in a commercial transaction. Outside the Donation Context.

46. Filing Requirements A penalty is imposed on a charity (including churches) that does not make the required disclosure in connection with a quid pro quo contribution of more than $75. The penalty is $10 per contribution, not to exceed $5,000 per fund-raising event or mailing. The charity can avoid the penalty if it can show that the failure was due to reasonable cause. Under a new record keeping rule effective for all cash, check, electronic funds transfers, credit card charges, or other monetary contributions of any amount made in taxable years beginning after August 17, 2006, the donor must obtain and keep a bank record or a written communication as a record of the contribution. Written records prepared by the donor (such as check registers or personal notations) are no longer sufficient to support charitable contributions.

47. Filing Requirements Bank records for this record-keeping requirement include bank or credit union statements, canceled checks, or credit card statements. They must show the date paid or posted, the name of the charity, and the amount of the payment. Taxpayers who claim charitable contributions made by payroll deduction can satisfy the record keeping requirement if the donor has :(1) a pay stub, W-2, or other document furnished by the employer that states the amount withheld for payment to charity, or (2) a pledge card or other document prepared by or at the direction of the charity that shows the name of a giver. An organization described in section 170(c) of the Principal Combined Fund Organization for purposes of the Combined Federal Campaign, will be treated as a donating organization for purposes of the new record keeping provision.

48. Filing Requirements The procedure for validating or authenticating all funds received on behalf of the church that will meet Internal Revenue Services regulations are as follows: (This information is for those who handle the church finances- re: Stewards or Finance Committee count the money) 1. Have a sign in roster which includes the names of those who are to count the funds and a place for them to initial. 2. Have these persons use red pens to circle or note the date and the amount of the donation on each envelope before opening. 3. Upon opening the envelope, write in red ink whether it is cash or check and if it is a check verifies the check number. 4. If there is an error on the envelope notate the correct amount that is in the in red and initial a second time or have a second person to initial. 5. Provide by mail a receipt of all contributions that are $250.00 or greater.

49. Filing Requirements Continued 6. Be sure that treasurer receipt the stewards or finance committee for the money. (The treasurer should not count the funds but simply deposit and let the receiptfrom the bank determine if there are any errors. This will keep the check andbalance system in line and when the treasurer and recording steward meet toreconcile the bank statement as per the Discipline, it will create a stronger checkand balance.) 7. Be sure to bind all envelopes. Make envelopes for any persons who put in checks without envelopes. Signify the envelope with a red initial. For all loose monies make one envelope and call it Mr. or Ms. Miscellaneous use the same name for every time you count fund and there are loose donation, which cannot be attributed to any one person. 8. At the close of the fiscal year, distribute year-end receipts to church members (and other donors) so they may validate their contributions. 

50. FREEMAN CHAPEL C. M. E. CHURCH REV. DR. ROBERT PEOPLES PASTOR DR. MARTHA GRANGER PRESIDING ELDER THE RTE. REV. E. LYNN BROWN PRESIDNG PRELATE ACKNOWLEDGMENT FOR CONTRIBUTIONS OF $250.00 OR MORE CONTRIBUTOR: _______________________ ADDRESS: ________________________ _________________________ TOTAL AMOUNT OF CONTRIBUTION (S): Cash_________ Check________ Check # _______ DATE OF CONTRIBUTION (S) DESCRIPTION OF ANY PROPERTY CONTRIBUTED: _____________________________________________________________________________________ _____________________________________________________________________________________ WERE GOODS AND SERVICES GIVEN IN EXCHANGE OF THE CONTRIBUTION (S) LISTED ABOVE? YES _____ NO______ IF SO, GIVE AN ESTIMATE OF THE VALUE OF THE GOODS AND SERVICES. * If the benefit received was an intangible religious benefit that is generally not sold in a commercial transaction outside the donative context, please state, but there is no need to describe or estimate the Value of the benefit. _____________________ ___________________________ _____________________ ___________________________ _____________________ ___________________________ DATE ISSUED. ______________________ OFFICER: _____________________ 137 VIRGINAI STREET HOPKINSVILLE, KY 42240 TELEPHONE (270) 885-2186