Giving to Caesar: Taxing Ministers

Preparing a minister’s tax return can prove challenging for everyone involved: The minister who must keep records, the church secretary who prepares the W2 forms, the church leadership who determines minister compensation, and the tax professional who prepares the return and advises for the future.  My goal in this article is to help ministers prepare for next tax season and to enlighten church leaders about how the IRS taxes their minister’s compensation.

According to the IRS, a minister is an individual who is “duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination.” To be considered a minister for tax purposes, these individuals must be hired by a church or religious organization to perform religious duties. 

Practicing ministers are considered “dual-status” taxpayers.  They are employees of the church for federal income tax purposes but treated as being self-employed when determining Social Security and Medicare taxes, unless they are exempt from these taxes.  To be exempt a minister must have taken a vow of poverty as a member of their religious order, or filed for an exemption.  Ministers can file for this exemption (using Form 4361) if they, conscientiously or as a matter of religious principle, are opposed to receiving public insurance payments.  Generally, a minister has until the due date of their tax return for the second year they are compensated for ministerial duties to file Form 4361 and claim this exemption.

Salaries a church pays to its ministers are considered wages and must be reported each year on form W2 (social security and Medicare boxes will be blank).  Payments a minister receives directly from individuals (for weddings, for example) are considered self-employment income.  Payments called “gifts” or offerings are also self-employment income if the minister performs a service for it. 

In fact, difference between a “gift” and earnings is often misunderstood.  Money is only considered a gift when the giver has not received and does not expect to receive anything from the minister in return, such as a sermon, a wedding, or a song.  In other words, if any service was performed in exchange for the “gift” it is taxable income to the minister.

Ministers can receive a parsonage (housing) allowance that is not subject to income tax.  Like wages and “gifts,” however, the allowance is subject to self-employment tax if the minister is not exempt.  A parsonage allowance is the rental value (including utilities) of a home provided by the church or cash paid directly to a properly ordained or licensed minister to rent or purchase a home (including utilities, taxes and insurance).  If a home is provided by the church, the amount excluded from income cannot exceed its fair rental value. 

If the minister receives a housing allowance in the form of cash, only the actual cost of housing can be excluded from income.  The non-taxable housing allowance must be the lowest of the following: 1) Fair rental value plus other costs such as utilities, 2) The amount of the allowance, or 3) Actual amounts paid for housing (mortgage payments (or rent), utilities, taxes, insurance, repairs, maintenance and furnishings). 

A minister can deduct personal expenses they incur in the performance of their duties.  Ministers who are not paid for their services can deduct these expenses as a charitable contribution.  A salaried minister, however, must deduct his employment-related expenses as a miscellaneous itemized deduction which will not be beneficial until the deduction exceeds 2% of Adjusted Gross Income (AGI).  Expenses incurred in the creation of business income (such as weddings) would be deducted on schedule C.  Furthermore, a paid minister who also receives tax-free income (such as a parsonage allowance) must reduce these expenses by the percentage of total income that was tax free. 

The ministry certainly has its rewards. It also has its challenges.  One of these challenges arrives each year around tax time.  In this article I was only able to highlight a few of the complexities impacting a minister’s tax return.  If you find yourself confused by these complexities, please feel free to contact our office to consult with a tax professional.

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The Types of Profit, And the One You Must Earn

In our last article, “Develop a Profit Paradigm” we discussed the importance of acknowledging two important facts about your business: 

Soon after this acknowledgement, most owners struggle to find a useful “profit” measure.  Eventually, most throw up their hands and ask:  “Exactly what is profit and how does it relate to MY business!?”  Answering this question will be the focus of today’s article.

What is Profit?  A basic definition of Profit is this: Money generated by selling a product or service that exceeds the cost of providing that product or service.  Simple enough, right?  Unfortunately, it is not.  Measurements used to calculate “profit” can vary greatly.  For example, your accountant will probably say that profit is your company’s “Net Income” on its Profit and Loss Statement – a number he wants you to maximize.  Your tax professional, on the other hand, will point toward “Taxable Income” as a measure of your company’s profit – a “profit” you hired him to minimize. 

In addition to often giving extremely different “profits,” both Net Income and Taxable Income are extremely limiting measures of business performance for two more reasons:

To compensate for these limitations, let’s consider a third type of profit: Economic Profit.

Economic Profit:   Economists use Economic Profit to measure the earnings potential of business resources.  In the small business world these resources include Labor, Time, & Talent.  Economic Profit differs from net income and taxable income because it includes an activity’s “Opportunity Cost” (money that could have made by doing something else with your resources – labor, time, and talent) as an expense. 

Here’s an example of how Opportunity Cost works: Say you left a job earning $75,000 per year to start your own business – $75,000 is the Opportunity Cost of starting your business.  If your business earned an annual “profit” of $50,000 your business did not earn an Economic Profit.  It actually incurred an Economic Loss of $25,000 (the $50,000 it earned minus the $75,000 you gave up).  You lost $25,000 because you started your business – a very real loss if you need that $25,000 to pay your bills!

Opportunity Cost also enables owners to compare the effectiveness of their business decisions to those of other business owners.  If your business earns substantially less than similar-sized businesses in the same industry, it’s incurring the opportunity cost of ineffective business decisions.  It may be time to review and redeploy your business resources.

Unfortunately, Economic Profit also fails to incorporate cash flow into its analysis.  As with accounting and taxable “profit,” a business can actually earn an Economic Profit while lacking the cash to pay its bills.  This limitation brings us to the measure we use to gauge small business performance: Entrepreneurial Profit. 

Entrepreneurial Profit:  Entrepreneurial Profit blends Accounting Profit, Economic Profit and Cash Flow into a single measure gauging a business’s ability to pay its bills, the owner’s bills, and generate growth. 

How is Entrepreneurial Profit Calculated?  Here’s a basic example: You leave a job making $6,250 per month – money you need to pay your living expenses – to start your own business.  Your business has a truck and other debt payments totaling $1,200 per month.  If your business’s monthly accounting profit is $5,000 what is its Entrepreneurial Profit?  Unfortunately, your business didn’t have one.  It actually incurred an Entrepreneurial Loss of $2,450 ($5,000 – ($6,250 + $1,200) because it was not able to pay both its costs and your bills.  This is very important because, if you’re like most small business owners, you ARE your business.  Your Entrepreneurial Profit lays out the cold, hard truth: To remain open and avoid severe financial hardship, your business must generate $2,450 more in monthly cash flow. 

A small business must survive before it can grow.  To survive it must cover its costs and pay its owner enough to make a living.  To grow it must generate excess cash to reinvest – it must generate an Entrepreneurial Profit.

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CAPTCHA – Protect Forms from Web Spam Bots

CAPTCHA , Completely Automated Public Turing test to tell Computers and Humans Apart, is a web security technique to protect HTML forms from web spammers. CAPTCHA dynamically generates security codes for sign-up, subscription submission or checkout forms to make sure that forms are not submitted by spam bots.

Because the generated password on a distorted image is a part of the image, users can’t copy and paste it. This way, it verifies that it’s an actual human that submits a form, not any kind of automated software including spambots.

The security codes that CAPTCHA generates are usually a combination of letters or digits that doesn’t mean anything. This technology can be used for any form submission on the Internet, including user registration, e-commerce transactions, surveys, Internet polls, search engine submissions, or free email registration.

CAPTCHA Example
CAPTCHA example Protect Forms from Spams

Free CAPTCHA installation plug-ins are available for many environments or languages including PHP, Perl, Phthon, WordPress, or MediaWiki.

Advantages of using CAPTCHA from captcha.net reCAPTCHA project:
– It prevents website registration spam.
– It prevents bogus comments in blogs.
– It protects email addresses from scrapers.
– It can be used more accurate online polls.

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Can’t Pay Your Taxes, What’s Next?

As the October extension deadline approaches to file individual tax returns many Americans find themselves face-to-face with an uncomfortable reality: owing taxes they are unable to pay.  Some did not have enough taxes withheld from their paychecks.  Others didn’t realize how much of their social security would be taxable.  Many are business owners who have a “paper-profit” but are stuck in the cash-poor mire of a reboundless recession. 

Regardless of the reason they owe back taxes, all face a common dilemma that includes the prospect of interest, penalties, and the vast collective resources of the federal government.  Today I’ll discuss the interest and penalties the IRS imposes on unpaid taxes and why it is important to file your tax return – especially when you owe a tax liability.  I will also share a few circumstances under which the IRS may remove assessed penalties. 

Interest: The IRS adds interest to past-due balances on a daily basis.  The interest rate used is determined every three months and is benchmarked by adding 3% to the federal short-term interest rate.  Due to an unusually low federal short-term rate, the IRS interest rate applied to underpayment of taxes is currently 3%.  It has remained at 3% since October of 2011.

Late-Payment Penalty:  The IRS also imposes two penalties on past due individual return balances.  The first is the late-payment penalty.  The late-payment penalty is one-half of one percent (0.5%) of the outstanding tax balance and is assessed each month or part of a month taxes remain unpaid up to 25% of the unpaid tax.  The late-payment penalty increases to one percent (1%) if taxes remain unpaid ten days after a Notice of Intent to Levy (a notice that the IRS plans to take property to satisfy a tax obligation) is filed.  The penalty is reduced to one quarter of one percent (0.25%) if the original return was filed by the due date and an installment agreement has been established.

Late-Filing Penalty: The late-filing penalty is equal to five percent (5%) of any unpaid tax.  It is assessed each month or part of a month a return is not filed passed the due date up to 25% of the unpaid balance (five months).  If a return is over 60 days late the minimum penalty is $135 or the tax due, whichever is smaller. 

Importance of Filing: There is a tendency for those who owe taxes to make the very costly mistake of not filing their returns by their due date.  Simply filing their return, even if it shows a tax due, will avoid the late-filing penalty and save 25%. 

At current IRS interest rates, simply filing the return before the deadline and requesting a payment plan for the balance due will be the same as taking out a loan with an annual interest rate of approximately 6%.  On the other hand, filing over five months late and not requesting a payment plan will cost 9% annually plus the 25% late-filing penalty to any balance due.

Removing Interest and Penalties: There are a number of circumstances under which interest and penalty may be removed by the IRS.  Unfortunately, however, it is the responsibility of the taxpayer to petition the IRS for their removal. 

Interest is the most difficult assessment to have removed and is generally only abated as the result of: 1) An IRS administrative delay, 2) It was assessed on a balance due caused by an erroneous, IRS generated refund, or 3) It was assessed during a period in which an extension was allowed due to a region being a presidentially declared disaster area. 

The IRS may remove late-filing and late-payment penalties if the failure to file or pay was due to “reasonable cause,” not intentional neglect.  What is deemed “reasonable cause,” however is quite limited and can include: 1) Destruction of the taxpayer’s home or business, 2) The taxpayer being absent from their “tax home” for reasons beyond their control, or 3) The death or illness of the taxpayer or an immediate family member. 

In this article we have discussed the interest and penalties imposed on delinquent individual taxes and the importance of filing your income tax return by its due date.  If you should have any questions or need assistance preparing your return or solving your own tax “problems” please feel free to contact our office to speak with a tax professional. 

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CAPTCHA – Protect Forms from Web Spam Bots

CAPTCHA , Completely Automated Public Turing test to tell Computers and Humans Apart, is a web security technique to protect HTML forms from web spammers. CAPTCHA dynamically generates security codes for sign-up, subscription submission or checkout forms to make sure that forms are not submitted by spam bots.

Because the generated password on a distorted image is a part of the image, users can’t copy and paste it. This way, it verifies that it’s an actual human that submits a form, not any kind of automated software including spambots.

The security codes that CAPTCHA generates are usually a combination of letters or digits that doesn’t mean anything. This technology can be used for any form submission on the Internet, including user registration, e-commerce transactions, surveys, Internet polls, search engine submissions, or free email registration.

CAPTCHA Example
CAPTCHA example Protect Forms from Spams

Free CAPTCHA installation plug-ins are available for many environments or languages including PHP, Perl, Phthon, WordPress, or MediaWiki.

Advantages of using CAPTCHA from captcha.net reCAPTCHA project:
– It prevents website registration spam.
– It prevents bogus comments in blogs.
– It protects email addresses from scrapers.
– It can be used more accurate online polls.

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Cars, Homes & Tax Deductions

The economic drought has stunted many nonprofits’ ability to serve their communities – just when their services are most needed.  As traditional donation streams dry up, charities are reeling to uncover new revenue springs.  One example of a creative, business-like solution has been Habitat for Humanity’s Cars for Homes Program.  This program allows for the donation of virtually any vehicle – running or not – to help families obtain affordable homes and shelter.  The Cars for Homes Program combines charitable giving with an extraordinary level of customer service.  Want to rid the driveway of the unused vehicle you must still pay insurance for (or – as in my case – the “oil-dripping eyesore” the Misses wants gone)?  Want to help your local Habitat for Humanity organization, and get a potential tax deduction?  It’s as easy as making a phone call or visiting a website.

How does it work? Habitat for Humanity has teamed up with a company named Advanced Remarketing Services, Inc (ARS) to collect, process and properly report all donated vehicles to the IRS and the Donor.  Vehicle donations (which can include boats, RVs, airplanes – even farm and construction equipment) are made by calling (877) 277-4344 or by visiting http://CarDonationWizard.com.  Once the vehicle’s title is received an ARS representative will be out to pick up the vehicle on behalf of Habitat for Humanity. 

Does the Condition of the Vehicle Matter?  Habitat for Humanity will accept most vehicles as long as they have four inflated tires, are in one piece, and the vehicle’s value exceeds the cost of towing and transport.

How Much Can I Deduct on My Taxes?  Be aware: The tax rules regarding vehicle deductions changed a few years ago but can still result in a tax deduction for those who itemize deduction on schedule A.  Prior to 2005, taxpayers could simply claim the vehicle’s fair market value (FMV) obtained from a reference guide such as Kelley Blue Book.  Since 2005, however, the rules have become more strict and complex.  The deduction amount allowed (if over $500) depends on how the organization uses the vehicle.  The charity reports this use to both donor and the IRS via Form 1098-C, Contributions of Motor Vehicles, Boats and Airplanes. 

How the Vehicle Deduction is Calculated

Outright sale by charity: If the vehicle is sold by the charity to a disinterested third party, the deduction is limited to the proceeds from the sale.  The charity reports this amount on Box 4c of Form 1098-C. 

Improvements prior to sale:  If the charity makes significant improvements to the vehicle (repairs that substantially increase the vehicle’s value), the donor will be able to deduct the vehicle’s FMV as of the date the contribution was made.  The charity notifies the donor and IRS of these improvements by checking Box 5A and describing the improvements in Box 5C on Form 1098-C.

Sale or transfer to needy individual: If the charity sells or gives the vehicle to a needy individual the donor will be able to deduct the vehicle’s FMV as of the date the contribution was made.  This is true even if the charity sells the vehicle for less than its FMV.  The charity notifies the donor and IRS of these improvements by checking Box 5B on Form 1098-C.
Significant use by charity:  If the charity retains the vehicle for use in its charitable purpose, the donor can deduct the vehicle’s FMV as of the date the contribution was made.  The charity notifies the donor and IRS by checking Box 5A and describing the vehicle’s use in Box 5C on Form 1098-C.

These reporting requirements apply when the vehicle’s “claimed” FMV exceeds $500.  If Form 1098-C is not received, the donor cannot deduct more than $500 for the vehicle.  If the donor is allowed to deduct the vehicle’s FMV they must be able to substantiate the deduction claimed.  Donors are not entitled to deduct the value listed in any valuation guide unless they can prove the vehicle’s condition warrants the claimed value. 

This article shares Habitat for Humanity’s Cars for Home’s Programs and information on deducting donated vehicles (including boats and airplanes) to charity.  There remain, however, many additional tax limitations.  As always, please remember that this or any article does not constitute or replace the advice of a qualified professional.  If you have any questions regarding your charitable giving or any other tax issue, please feel free to call our office at (304) 267-2594.

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Business: The Freedom Experience

In the past, I have shared a brief outline of the Five Pillars of Business Growth.  The “Five Pillars” represent core characteristics business owners must develop as they transition from being product sellers (florist, jeweler, restaurateur, etc) and service providers (mechanic, doctor, carpenter, plumber, or appraiser) to owners of profitable, scalable companies.  These characteristics:

Before a business owner can develop and apply the Five Pillars, however, we ask them to forget about money, the product or service they provide, what the competition is doing, and many of the sales “techniques” they learned in books, seminars, and business school.  Instead, we ask them to consider two facts. 

Fact one: As a business owner, your livelihood is ultimately determined by others – free-thinking individuals deciding how to best fulfill their wants and needs.  And,

Fact two: Something indescribably special happens every time one of these free-thinking individuals chooses (trusts) your business to fulfill their wants and needs over all other options. 

Today I will discuss the unique but often overlooked relationship that exists between a business, its customers, and community.  Sustainable business growth, especially small business growth, is NOT the result of a myopic strategy to steal dollars from customers and the competition.  In fact, the polar opposite is true – business growth comes from forming win-win relationships.  Ultimately, the level of success you enjoy is determined by how efficiently and effectively your business increases the life-quality of its customers.  In other words, success results from the masterful application of the “Golden Rule.”

As a small business owner you are, perhaps, one of the last bastions of a true free-market (purely competitive) economy.  Your customers are your neighbors, friends, and family: free-thinking individuals who have a variety of options with which to meeting their wants and needs.  They choose how, when, where and, most importantly, WHO they buy from.  They decide which mechanic to hire, in which bank to deposit their paychecks, which hairstylist to frequent, which newspaper to read – and they are under no obligation to choose you. 

So, why does a customer choose one business over another?  Consider this: All mechanics have some basic ability to fix cars or they wouldn’t be mechanics. So, why do you drive past three other mechanics to arrive at YOUR mechanic?  All hair stylists share a basic level of knowledge, skill, and ability.  So, why do you forsake all others to arrive in YOUR barber or stylist’s chair?  What about YOUR dentist, YOUR doctor, YOUR bank, YOUR insurance agent.  Why do you continually choose these businesses?  Drill down on these answers and you will discover that what you are really buying is NOT the product these businesses provide.  Instead, you are buying the EXPERIENCE of obtaining the product from these businesses.  You return to these businesses because the value each experience adds to your life exceeds the value of the dollars and time you trade it. 

So, what is this experience and what does it mean for your business?  It means that as long as you are selling quality “stuff,” the “stuff” you sell; car repair, banking, dentistry, etc, is not why your customers choose your businesses over all others.  Your “stuff” is not what customers really buy.  They could buy your “stuff” somewhere else.  What customers really buy is the EXPERIENCE of purchasing this “stuff” from your business.  This “experience” is your real product – the totality of everything that comes into contact with the customer – everything. 

Grow your business starts by taking two important steps:

Successful businesses owners are constantly evaluating and improving the experience of their customers.  They exist to improve the life-quality of their customers and their community.  In short: they “Live to Serve”.

 

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