Tax and Legal Update for Churches

Recent Tax, Finance, and Legal Developments Impacting Ministers, Missionaries, Churches, and Other Nonprofit Organizations Evangelical Council for Financial Accountability 440 West Jubal Early Drive, Suite 130 • Winchester, VA 22601 540-535-0103 • 800-323-9473 • Fax 540-535-0533 ECFA.org Updated as of October 31, 2011 ______________________________________________________________________________________________________________________________________________ This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional. 2 Recent Developments 1. Threats and options for the charitable income tax deduction. The charitable deduction, as we know it, is more at risk today than at any time in recent memory. Attention on the charitable deduction is primarily driven by federal deficit challenges and the desire of Congress to find additional revenue. For the fourth time in his administration, the president has proposed to limit the value of the charitable tax deduction by reducing the tax benefits for charitable giving by high-income taxpayers in addition to proposing increasing the tax rates for the same taxpayers (including in the American Jobs Act that the administration introduced on September 8 and was subsequently defeated). It is clear the administration believes one important way to improve the economy is for Americans to give less to charity. Recent studies indicate that a cap on the deduction could result in loss of charitable giving of $2.9 billion to $5.6 billion each year. To put this in perspective, $5.6 billion equates to eliminating all of the private donations each year to some of the top U.S. charities, such as the Red Cross, Goodwill, the YMCA, Habitat for Humanity, the Boys and Girls Clubs, Catholic Charities and the American Cancer Society combined. The President’s special fiscal commission advocated the same idea, suggesting the charitable deduction should be replaced with a credit—the credit being as low as 12%. The Congressional Budget Office report, “Options for Changing the Tax Treat- ment of Charitable Giving,” refers to charitable gift deductions as “subsidies” (the cost in foregone revenues to the federal government).1 On October 18, 2011, the Senate Finance Committee conducted a hearing on charitable gift incentives. Coming out of this hearing, the charitable deduction floor appears to be getting significant traction. A floor of perhaps $500 per year for single taxpayers and $1,000 for married taxpayers filing jointly is touted as improving the incentive aspect of the deduction by encouraging contributions at the margin. In other words, a floor would reduce the windfall that many taxpayers receive for charitable contributions they would have made with or without a tax benefit, and so could make the deduction more cost effective. A floor could have administrative benefits, by taking away opportunities to cheat on low-value contributions, especially of noncash property. Some might argue that the floor would not be fair to those taxpayers who currently give at or below the floor. 1 Options for Changing the Treatment of Charitable Giving, Congressional Budget Office, May 2011. ______________________________________________________________________________________________________________________________________________ This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional. 3 Such taxpayers might see their tax benefit eliminated, while others with more capacity to give would continue to get tax benefits for giving. 2. American Jobs Act of 2011 Would Limit Deductibility of Charitable Contributions for Certain Taxpayers. In an address to a joint session of Congress on September 8, 2011, the President outlined a package called the “American Jobs Act," including incentives for businesses and a payroll tax break for workers, help for the unemployed and much more. The proposals would: Cut the payroll tax for employers in half to 3.1% on the first $5 million in wages. Eliminate the 6.2% payroll tax for organizations that increase their payroll by adding new workers or increasing the wages of their current workers (the benefit would be limited to the first $50 million in payroll increases). Create a tax credit of up to $4,000 for hiring workers who have been looking for a job for over six months. Create a new tax credit of up to $5,600 for hiring unemployed veterans who have been looking for a job for more than six months. Cutting social security tax for employees in half in 2012, from 6.2% to 3.1%. For 2011, workers pay 4.2% social security tax (down from 6.2% for 2010) on the first $106,800 of wages. Presumably, the OAASDI rate for self-employed individuals would be cut as well. Among the proposals for funding the administration is also proposing a 28 percent limitation on certain deductions and exclusions, including the charitable contribu- tion deduction. Jack Lew, the director of the White House Office of Management and Budget said, “the Congressional panel charged with finding at least $1.2 trillion in savings this fall as part of the agreement to raise the debt ceiling will have the option of accepting the payment proposals submitted by Mr. Obama, or proposing new ones of their own.”2 This section would limit the value of all itemized deductions and certain other tax expenditures for high-income taxpayers by limiting the tax value of otherwise allowable deductions and exclusions to 28 percent. No taxpayer with adjusted gross income under $250,000 for married couples filing jointly (or $200,000 for single taxpayers) would be subject to this limitation. The limitation would affect itemized deductions and certain other tax expenditures that would otherwise reduce taxable income in the 36 or 39.6 percent tax brackets. A similar limitation 2 Cooper, Helen, The New York Times – The Caucus Blog, http://thecaucus.blogs.nytimes.com/2011/09/12/obama- pleads-for-congress-to-approve-jobs-bill/ as accessed on 9/14/11. ______________________________________________________________________________________________________________________________________________ This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional. 4 also would apply under the alternative minimum tax. This section would be effective for taxable years beginning on or after January 1, 2013.3 The bill also addresses other issues effecting teachers, schools, first responders, the national infrastructure, matters reflecting the wireless spectrums, and a prohibition of discrimination in employment on the basis of an individual’s status as unemployed. On October 11, 2011, the Senate rejected an amended version of the American Jobs Act. The amended version did not include a reduction in the charitable income tax deduction but featured a millionaire’s surtax. 3. IRS releases guidance on tax treatment of employer-provided cell phones. On September 14, the IRS released guidance stating that the value of employer provided cell phones is deductible by the employer without heightened substantiation and is excludable from the employee’s income as a fringe benefit. Notice 2011-72 provides that employer provided cell phones are excluded from the employee’s income as working condition fringe benefits, and that the substantiation requirements for deduction under section 162 are considered satisfied. This applies for tax years beginning after December 31, 2009. This guidance applies only to cell phones provided for “substantial reasons relating to the employer’s business, other than providing compensation to the employee.” Cell phones provided for employee morale or good will, or to recruit prospective employees, are not provided for “noncompensatory business purposes.” In conjunction with Notice 2011-72, the Service has released a Field Memorandum for field examiners, providing audit guidance on this issue. Among other things, it addresses the treatment of reimbursements for the business use of an employee’s personal cell phone. Before making reimbursements, organizations should generally require employees to submit a copy of the monthly bill and evidence that the bill has been paid. If an organization does not have a substantial noncompensatory business reason for providing a cell phone to an employee, or reimbursing the employee for business use of his or her personal cell phone, the value of the use of the phone, or the amount of the reimbursement is includible in gross income, reportable on Forms 941 and W-2, and for lay employees is subject to federal and state employment tax withholding. 4. Minister’s housing allowance constitutional challenge dropped/new lawsuit filed. On June 17, 2011, the Freedom from Religion Foundation (FFRF) and related parties agreed to a dismissal of their lawsuit challenging the constitutionality of tax exemptions for parsonages and other ministerial housing. A 2011 U.S. Supreme court decision involving a scholarship plan in Arizona raised serious questions as to whether the plaintiffs in the housing allowance case had legal standing to pursue their case. A housing allowance involves no direct 3 President’s

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