Common Mistakes Made By Ministers, Part 2!
By Raul Rivera
A Three-Part Series on Common Mistakes Made by Ministers!
Last week I wrote on two common mistakes made by ministers. Most ministers fail to set up the housing allowance and self employment tax exemption correctly and in a timely manner. They believe that because they are not drawing a salary at the church, they do not need the allowance and exemption and will not qualify for it. These are the two most common mistakes, but there are several others that need to be addressed.
Mistake # 3 Illegal Reimbursements
Whether a church is just getting started or has been around a long time, the founding pastor usually has a lot of personal funds invested in the church. The vast majority of pastors use their own funds to start their churches and continue to use their resources when the church tithes and offerings are not enough to cover the bills. This usually leads to reimbursements at a pace the church can afford; sometimes a few months later and sometimes a year later. While a reimbursement is certainly OK, timing is everything. Did you know that there are requirements for reimbursements to be submitted within a specified period of time?
The mistake: Many pastors, though honest, get reimbursed without ever using a reimbursement form. Without using a reimbursement form, there is no real way to properly document the expense and show a clear paper trail that legitimizes the expense. The real root of this problem lies in the timing.
Because of a lack in funds, pastors usually wait for a time when the church can afford to issue a reimbursement before he or she submits a reimbursement form. Are you aware that federal regulation requires that the request for reimbursement be submitted in a way that it can be substantiated? The church must have a reimbursement policy that sets the rules of a reimbursement. The rules must include a date by which the reimbursement must be requested after the original purchase was made. The reason for this falls under Regulation 1.62-2(k). It says that if a payer's reimbursement, or other expense allowance arrangement, evidences a "pattern of abuse", the rules of section 62(c) will apply and make all reimbursements taxable and treated as income to the receiver even if it was a legitimate reimbursement. Moreover, the reimbursements are subject to payroll taxes and penalties.
Do not make the mistake of holding a reimbursement too long. All churches should adopt a section 62 reimbursement policy that sets forth a 60 day limit upon which a reimbursement request can be made.
Mistake #4 Pastor, or Pastor's Spouse, Signs Own Paychecks and Reimbursement Forms
Many churches do not have a large number of people serving in a leadership role. Because of this lack, the pastor or his spouse often times sign their own paychecks and reimbursement forms. This is a common practice among many independent and nondenominational churches.
The mistake: Though they may have honest intentions and good hearts, many pastors feel that it is OK, so long as they leave clear paper trails. Because of the requirements of section 4958 and the laws of many states that govern conflicts of interest for nonprofit organizations, this practice may have severe consequences on the church. This is a very common problem and one that the IRS will look at closely during an inquiry.
Mistake #5 Giving tax deductible receipts for non-cash donations
Pastor Montero was delighted when a member of the church donated a 15 passenger van worth $12,000.00 to the church. Now the children's program could easily bus in kids from all over the city. The pastor immediately registered the title in the church's name, purchased insurance and gave the donor a receipt for $12,000.00.
The Mistake: When a church or ministry receives a donation of anything that is not cash, it is prohibited by section 170(f) from issuing a receipt that uses a dollar amount. In fact, the only thing the church/ministry can do is to give a thank you letter describing the item and to also explain how the donation helps the church accomplish its purpose. It is the donor's responsibility to properly claim a tax deduction on IRS form 8283. When a church receives a donated vehicle, it has to file that donation on form 1098-C and report it to the IRS.
Correcting Common Mistakes
Some of the mistakes listed above are the type that can be corrected by making simple adjustments. A couple of them, however, cannot be fixed retroactively and can only be corrected from this point forward. The three mistakes discussed above are covered in our Church Compliance & Ministry Empowerment Conferences.